Carl Lamb discusses how discretionary fund managers can assist advisers
Post-RDR, today's independent financial advisers are a breed of highly qualified, empathetic individuals whose aim is to provide a seamless, accountable advice service to their clients.
So why should these experts opt to use the services of a discretionary fund manager (DFM) to manage their clients' investment portfolios?
There are a number of reasons why I took the decision to go down this route.
Firstly, it is important for us to offer a range of potential solutions designed to meet the needs of all our clients, from the most passive investor who wants to just leave matters in our hands up to the most active who is looking for hands-on involvement in making investment decisions.
For some, a bespoke professional fund management service is appropriate - so we offer it.
For the IFA, there is also a balance to be achieved between the time needed to provide a proactive fund management service in-house and its benefits in terms of income.
It is true that a DFM arrangement will add a layer of cost for the client, but this cost would equally need to be covered if the IFA were to provide an enhanced investment management service in-house.
If we accept that pro-active fund management will provide benefits to clients in terms of ROI, then it is simply a case of determining who is best to provide that service.
Good IFAs will focus on the holistic viewpoint, looking at the longer term, considering lifetime goals and needs. An awareness of the movement of markets is integral to their service, of course, but they cannot both keep their eyes on the horizon and maintain a minute-by-minute study of their clients' investments.
Fund management is a job for specialists - technical boffins with their noses pressed to their screens watching every shift in the markets and analysing every nuance of changing moods in global affairs.
The key benefit of a DFM is the ability to access and buy into a robust research capability, and clients are quite prepared to pay for this. Experience shows that clients value this approach particularly where markets are volatile and where careful asset allocation can have a proven positive impact on performance.
Another advantage of the DFM route is the buying power the fund managers have that is not available to retail customers. They can access investment structures and funds that individuals simply cannot. This, combined with pro-active and reactive management, will generally allow the DFM to achieve performance levels that justify the added cost.
For certain investors, such as trustee clients, the DFM offers a solution that meets their statutory obligations.
Trustees are required under the Trustee Act 2000 to have a regard to the need for diversification within the trust's investment portfolio and in many cases, particularly where a trust is expected to remain in place for some considerable time and where the requirements of the beneficiaries are complex, then a DFM can provide a good solution to meet the trustees' duty of care.
The use of a DFM also brings benefit to the administration of an IFA business as it introduces an element of formality to the way our clients' assets are managed and, importantly, provides an audit trail. It ensures consistency of approach and, from a compliance perspective, offers a repeatable, robust process.
Some argue that adopting a DFM approach distances the IFA from the client's portfolio and therefore from the client. I would say that in most situations a DFM will manage only part of a client's wealth and will have nothing at all to do with projecting lifetime needs and goals.
Theirs is the job of building a specific pot, and it is the job of the IFA to advise if the DFM arrangement will be of benefit to the client.
Of course, choosing an appropriate DFM is critical to the provision of the service. It should not be done lightly - you need to carefully investigate the potential candidates.
Comprehensive research is the key; any DFM you consider should be prepared to enter into an extensive dialogue with you and to provide a full and frank disclosure of any business information you request.
One useful resource is the ARC report, but coupled with this will be industry research, recommendations and face-to-face meetings. Get evidence to support any claims they make and study their terms of business carefully. Negotiate the best possible deal for your clients.
Don't limit yourselves to an exclusive arrangement - your clients' interests will be best served by a choice of DFM providers. Finally, and importantly, review the arrangement regularly to ensure it continues to meet your clients' needs.
Carl Lamb is managing director of Almary Green
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