David Cartwright, head of insight at Defaqto, highlights the key considerations when selecting a discretionary management partner for your firm.
The onset of the Retail Distribution Review (RDR), tricky markets and an imperative for all advisers to construct a robust, consistent and professional investment proposition, have all contributed to the re-emergence of discretionary management as a real investment outsourcing option.
However, 20 years ago, when discretionary management was equally as popular among the adviser market, there were really just two options. The first was bespoke discretionary management for the very wealthy, built to order and very much focused on the service element.
The second was managed portfolio services, a one-size-fits-all solution where all clients in a particular option got the same, or at least a very similar, portfolio. Many of our most successful multi-managers came from this world.
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Of course, these two solutions still exist, and are broadly aimed at the same target markets. However, technology has increased distribution avenues and, at the same time, created some grey areas and uncertainty. The taxonomy of the discretionary market is very different now to what it was 20 years ago, and perhaps more fundamentally the terminology being used is open to misinterpretation.
Bespoke portfolios, I would hope, are relatively clear. A portfolio is built and managed with an individual in mind. There will often be a close relationship between the discretionary manager and the client.
The real problems occur with the ‘one-size-fits-all’ solutions. They are sometimes referred to as model portfolio services, sometimes as managed portfolio services. We believe all ‘one-size-fits-all’ solutions should generically be referred to as managed portfolio services, as the phrase model portfolios means different things to different people and can lead to fundamental confusion (see box, below right).
Platform technology is the investment administration solution of choice. Most discretionary managers have now got over the realisation that to be hosted on a platform they will give up custody of assets. This was essential as an enormous amount of client assets are held on platform, so any serious effort to target the adviser market would have to accept this.
However, this distribution avenue does add complications to the taxonomy of the market. By hosting on a platform, the discretionary manager is effectively outsourcing some of the services they would normally provide to the platform. More than this, they are restricted to using the investment vehicles that the platform has access to.
This may improve the service or it may reduce it. Either way, it is important to understand that a discretionary service accessed through a platform may be different to that same service accessed directly.
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