Dave White looks at the merits of discretionary fund managers and predicts a rise in their star as RDR looms.
Outsourcing to a discretionary fund manager (DFM) has long been an effective method in managing portfolios and this trend is only likely to grow as we approach the Retail Distribution Review (RDR).
RDR has been borne out of a desire to raise the level of professionalism within the advisory arena, increase clarity around the payment process and improve the investment management process clients receive.
As such, its introduction on 1 January 2013 has resulted in many advisory businesses being forced to review their approach and will undoubtedly prompt many more to delegate investment decisions to a DFM in order to help satisfy the requirements.
The role of the DFM is clear; to maximise portfolio growth and protect the fund against unwelcome drops in the market. While some advisers themselves possess the skills to do this, they may not wish to shoulder the responsibility going forward as part of their proposition to clients.
Recent volatility, fuelled by events in Europe, has meant that clients have had to be extra vigilant in assessing the level of risk they are exposed to and react quickly to changes in their portfolio. While the beauty of a SIPP lies in its ability to offer pension investors much greater freedom and control than previous options, it also requires specialist knowledge in order to help it achieve maximum potential.
Picking the right investments has always been a delicate business and with the current economic turmoil wreaking havoc on the markets, the need for a specialist has never been greater.
Given their deep knowledge of the investment arena, DFMs have the experience, confidence and ability to react quickly to such events and have a deep understanding of which investment categories offer the best returns in accordance with the client's risk appetite. Furthermore, they have the power to make changes without seeking the client's authorisation first, thereby making investments far more responsive.
Like most things, the investment management industry has grown significantly in recent years and it is the job of the DFM to keep up to speed with the latest developments to help mitigate losses.
By collaborating with DFMs, our aim is to offer a logical and specialist proposition that suits clients' needs right across the board. From the basic to the bespoke end of the market, joining forces allows us to offer our advisers access to a wide range of options and the chance to place their client's pension pot in the most experienced hands.
It is not only the client who benefits; employing a full time DFM affords advisers the opportunity to focus on building lasting client relationships and non-investment issues.
Traditionally, DFMs have been seen to be an expensive addition but this is not necessarily the case; the combination of two complementary charging structures can actually work out cheaper for the client. What needs to be tackled first is the confusion surrounding who pays for what.
A transparent approach is vital so that clients understand exactly what they are getting for their money. The onslaught of RDR will ensure that it is clearly and accurately specified who is responsible for paying what, especially if a third party is introduced into the equation.
Dave White is managing director of Hornbuckle Mitchell
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