Graeme Clark discusses discretionary management
Discretionary investment management, by which all investment decisions are made by a professional team on behalf of the investor, is a highly topical subject, thanks in no small part to the Retail Distribution Review (RDR). In the run-up to RDR implementation all IFAs are carrying out thorough and strategic reviews of their business models and re-evaluating how to deliver what clients need. A thorough examination of how to deliver best practice investment management forms an important component of the IFA review; hundreds of IFAs are currently carefully reviewing the outsourcing of investment management functions.
To be compliant in the post RDR world, IFA businesses will have to ask themselves whether they have the expertise to run investment portfolios on behalf of their clients. It is inevitable that the answer for many IFAs will be ‘no’. Managing investment portfolios on a discretionary basis is time and resource intensive, and for a large number of IFAs, either the cost of taking on this aspect of wealth management is too great, or the focus takes them away from what they are particularly good at, namely building and maintaining strong relationships with their clients. Handing over the discretionary investment management aspect means that IFAs are likely to concentrate on more traditional aspects of their businesses, leaving them with more time for tax planning and working with their clients to ensure that their overall financial goals are met.
There are three primary ways in which an IFA can outsource the investment management function of their business.
- First of all, there is the multi-manager approach. This method uses platforms and allows for the outsourcing of a number of aspects of investment management, from individual fund selection to overall asset allocation. Platforms continue to develop and adapt to meet the needs of a wide range of IFAs, however, outsourcing via a platform is likely to be of particular interest to IFAs managing modest portfolios.
- Secondly, for IFAs who wish to contract out all aspects of the investment management process, they can do so via a discretionary investment management mandate. This has become a more feasible option over the last few years and tends to attract those who have funds in excess of £100,000, due to the fees payable under a discretionary mandate.
- Thirdly, the final option is a mix of the platform and discretionary mandate approach. This method means that fund experts construct and manage risk-rated portfolios for specific selection within a platform.
Discretionary investment management has traditionally been viewed as a premium solution. It is now being used more widely by IFAs through the links offered via SIPPs and offshore bonds.
A number of strategic partnerships between IFA businesses and discretionary investment managers have emerged in recent months, as IFAs capitalise on the benefits of third party investment management expertise and discretionary managers see the potential to increase funds under management through the IFA network. A word of caution though; trust is essential to building a good business relationship between both parties. For advisers, who are entrusting their clients’ assets to a third party, there must be absolute confidence in the discretionary manager.
Communication is central to building trust and strengthening the IFA/client/investment manager relationship. Some discretionary investment managers even facilitate face-to-face meetings with all three parties and also provide regular communication to advisers and their clients. Advisers’ clients also benefit from direct access to their portfolios via dedicated online valuation facilities where all investments are consolidated and viewable in one place. This is an area where the adviser and their clients can really benefit from external discretionary investment management expertise.
However, the RDR does present one challenge for independent discretionary investment managers who wish to retain their independent status under RDR while running their traditional portfolio modelling techniques. By taking this one step further and creating their own funds or corporate structures to hold and manage assets, questions may be asked as to how ‘independent’ the investment manager will really be in the post 2012 world.
In spite of this, as RDR implementation approaches there is likely to be a rise in the number of unions between IFAs and discretionary investment managers. For the adviser, the benefits of focusing on providing holistic financial advice while maintaining portfolio risk management controls and modelling can bring enormous freedom in the RDR world.
Graeme Clark is head of private clients at Courtiers Investment Services
Three years at the Treasury
Address key mistakes
Letter from the frontline
Breaching SEC rules
In Leeds since 1969