Outsourcing the investment process goes some way to easing the regulatory burden for IFAs, but plenty of research is required before this step can be taken.
Multi manager is one way of achieving investment outsourcing, but I would like to consider the use of discretionary fund managers (DFMs), who according to Defaqto, are creeping back into the market. The increasing popularity of open architecture products such as SIPPs and offshore bonds has driven several fund managers to develop an IFA focused strategy for the future.
So where does the IFA start their research? There is no independent research tool available to the IFA, although the Association of Private Client Investment Managers (www.apcims.co.uk) has a very useful filter which will take you on the first step.
A significant filter, particularly for those based out of London, will be location of offices, especially when looking for DFMs to meet regularly with clients.
Factors to consider in selecting a DFM are: Minimum Investment – most DFMs have an investment minimum of around £200,000 but this is worth checking.
Cost – IFA and DFM both need to be remunerated. Does the DFM operate a sliding scale of fees based on the total assets under management or a flat fee, and is the charging structure complementary to the IFAs? Does the DFM fee include a payment to the IFA, and is this used to reduce the client costs should the IFA waive their entitlement? Does the DFM fee include other costs such as establishment costs, dealing fees etc, and is there an additional charge for ad hoc valuations? You should also establish what the DFM charges if you wish to move the portfolio in the future.
Service – What services will be provided to both you and your client, including valuations, meetings, tax statements, online access etc? And what access will you have as an adviser to other value added services, such as market commentaries?
Investment process – An obvious one. It is important that the investment process used by the DFM matches the aims of your clients. This would include consideration of their approach to risk and how they monitor and apply it to individual portfolios. An understanding of the investment philosophy of the house; how do they select individual stocks or funds from the universe available? And what assets will they invest in. Some houses specialise in certain areas, such as AIM portfolios, and many will not use vehicles such as hedge funds, derivatives or structured products.
Size and resources – Smaller DFMs can often be more nimble in the market place, but not have the research resource or expertise that larger firms will have.
I always like asking how many portfolios the individual manager personally manages, and what they feel their optimum number of portfolios might be. Just like IFAs, different DFMs can manage different client numbers, and these numbers can tell you a lot about how the firm is run and the attention each client will receive.
Provider and custody – If the DFM is to manage SIPP or bond money, make sure that your preferred DFM and SIPP or bond provider can work together. Matters of custody can often be an issue for bond providers and DFMs alike, and many Life Office SIPP providers only offer access to a panel of DFMs.
I would urge anyone defaulting to a SIPP provider’s panel to ask the SIPP provider why the listed DFMs are on their panel and more importantly why others that you may be considering are not.
Tony Clements is a chartered and certified financial planner at Lothbury Group
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