Guy Myles assesses the elements of a good discretionary management service
Advisers need to know that a discretionary management service will deliver for their clients in terms of both service and performance. This is especially important in light of the forthcoming Retail Distribution Review (RDR). Advisers need to know that the service they choose will allow them to meet new regulatory requirements and continue working efficiently.
However, it isn’t always possible for advisers to find answers to these simple questions and have these basic needs met. Ironically, the very thing that makes discretionary management attractive, as a highly specialised bespoke service, is also what makes it opaque. The level of specialisation has created a lack of transparency across the industry, with no consistency or standardisation. Furthermore, there is no legal obligation for managers to declare performance publicly.
This has contributed to a general air of exclusivity which isn’t conducive to delivering good service to advisers or clients. On a practical level, it has also made it difficult for advisers to assess and compare services. This is particularly galling in view of the fact that traditional discretionary wealth managers often charge high fees. In light of these issues, what advisers need is a service that brings clients personalisation but with transparency and lower costs, while also fitting with their need to work efficiently.
This means a service which is not only characterised by transparency around costs and performance but also accessible at investment stage. The service needs to be high level and allow long-term flexibility for both clients and advisers. For advisers, there also needs to be clear delineation of responsibilities between themselves and the manager.
Accessibility is crucial. Even if a service looks as though it can deliver, if the minimum investment amount is too high, some clients won’t be able to afford it. High minimum investments also often reflect nothing more than the aforementioned exclusivity, and can simply be taken as a warning sign.
Transparency around costs means advisers can work out what a service is really going to cost a client. Traditionally, discretionary managers don’t provide a total expense ratio (TER), yet this is what will help advisers in an overall assessment of a service, in uncovering all charges and in comparing services. Managers who provide a TER and breakdown of charges are thus infinitely preferable.
Similarly, transparency around performance is essential. The more advisers can find out about performance, from fund managers’ track records, to performance targets, to how these relate to fees, the more firmly they can establish if the investment engine of a service is any good.
Under a watchful eye
One way to optimise performance potential for clients is by focusing on services which give clients access to the whole of the market. Services underpinned by multi manager funds, which invest in funds and fund managers around the globe, and cover all asset classes, will be well placed to deliver returns as well as ensuring diversification. An important feature of multi-manager portfolios is that there is constant monitoring of managers to make sure they keep performing – and those who aren’t are replaced.
This approach should help to ensure ongoing suitability for clients and also help keep costs down. As an inbuilt feature of the service, transaction and trading charges should be kept low when portfolio composition is altered or clients switch between profiles. It also means that managers can work to avoid taxable gains on clients’ assets through regularly changing asset allocation. So this kind of multi-manager based discretionary management service is not only flexible but tax-efficient.
Advisers themselves can also benefit from the flexibility of this type of service as it can easily be integrated with their existing advice processes, including their own risk profiling tools and back office systems. This is what will really help advisers as they seek to manage the extra regulatory burden that will be imposed by RDR. It helps to ensure that they will be able to continue upholding regulatory requirements, yet have the time to concentrate on growing their business and developing relationships with clients.
This last point relates to how a well designed discretionary wealth management service can meet advisers’ needs for a clear division of responsibilities. It is important that there is no confusion about client ownership. The adviser needs to own the client relationship, with the investment management simply outsourced, and no risk of disintermediation at any point. Advisers need to have clear communication with managers about strategy and activity within clients’ portfolios, allowing them to build on their role as the client owner.
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