Advisers outsource to Discretionary Fund Managers (DFMs) for a variety of reasons including expertise, managing risk and to save time. With numerous DFMs on the market to consider, choosing which to include in your Centralised Investment Proposition isn’t just about undertaking extensive and appropriate due diligence. You must also make sure that your clients’ needs are met and that the portfolio range you offer matches the profile of your clients.
Below are four key things an adviser should consider when outsourcing to a DFM.
Strategic alignment – Does the DFM match your business?
A DFM with substantial assets under management (AUM) might be impressive at first glance and a quick and easy tick box when shortlisting providers. However, while AUM and the growth of AUM can indicate a DFM’s longevity and success, it doesn’t show if they are a good fit for your business strategy and clients’ needs.
When considering and shortlisting a potential DFM, preparing a list of questions to find the best suited for your business is essential. Your final list of questions will be specific to your own circumstances and requirements but below we highlight some that we feel will help you answer which DFM is the best fit.
- Do we share similar company values and organisational characteristics? What is the company culture like, are they independent and who is the investment management team?
- What investment propositions are required to suit your client segments? Does the provider offer a suitable range? How is the proposition delivered? What extra services do they provide?
- Does it suit the client segment to have active, passive, income or ethical focused portfolios
Segmenting your client bank and focusing on their needs, will help in answering the above question and choosing a suitable solution.
Client relationship enrichment – How is the service delivered to your client?
Whether you are considering a DFM under an ‘agent as client’ or ‘reliance on others’ relationship, selecting one that can support client reporting, attend meetings, and deliver timely market communication should be a key consideration.
MIFID II requirements such as pre and post sale reporting and the ‘10% drop’ rule has added communication obligations to Financial Advisers. It is the responsibility of the Adviser to update their client of any changes, so having access to easy-to-understand reports, account mangers or access to the investment team is an important support to your client management.
Investment process – Does the investment philosophy suit your clients’ goals?
Understanding DFMs’ different investment philosophies and the impact that these can have on returns and volatility over the time horizon for clients’ financial plans is important. Without proper scrutiny it is easy to believe that all DFMs are managing money in very similar ways and that returns will be very similar. However, there can be a considerable difference between those who prefer the more traditional equity-biased approaches and those who have gone down a multi-asset route, for example. Those kinds of differences are likely to be magnified in the long run.
Taking time to effectively scrutinise DFM investment processes will allow Advisers to assess which are more likely to suit individual clients.
Cost and charges – What are your clients paying for?
There are of course a number of fees and costs associated with outsourcing portfolio management.
With MiFID II making cost more transparent, it has become a lot easier for Advisers to compare potential DFMs and decide if it is the right solution for their clients’ requirements. Since 2018, when MiFID II was rolled out, DFM’s have been required to disclose appropriate information on all costs for both investment and related charges, including cost of advice, cost of the financial instrument recommended to the client and third-party payments.
Once you have a shortlist of DFMs to choose from, simply going for the cheapest management fees might not give you the best value for money. Additional services can bump up the charges but the level of service you get in return could end up being invaluable.
FE Investments offer a range of risk-targeted portfolios, leveraging FE fundinfo's expertise in fund data and software. Our Managed Portfolio Service is created to focus on the risk within the asset allocation and the underlying funds. Combined with proprietary portfolio management software we produce portfolios that aim to deliver a consistent return profile, without any undue surprises, and that cater for a wide range of investor needs.
The price and value of investments and their income fluctuates. You may get back less than you originally invested