When using discretionary portfolio management services as a part of your investment advice process, it is critical to undertake the right due diligence on the providers as you will be embarking on a close working relationship based on trust to achieve the best outcomes for your clients.
To help you when looking for, reviewing, and selecting model portfolio service (MPS) providers, we’ve suggested six key elements to consider.
1. Investment methodology
Most model portfolio service providers offer risk optimised or risk targeted models that aim to provide solutions for a range of investor profiles.
Reviewing the methodology used to create the portfolios is key to understanding what sets one provider apart from another. How are the models put together? How many asset classes do the portfolios cover? How many funds? Are they deterministic or stochastic? Are they high conviction or fairly neutral? Are they built using quant and qual selection? How regularly are they rebalanced?
It can be a complicated issue, but asking these questions helps you to find out more and start to separate various providers.
2. Ongoing governance
Whether partnering with a discretionary fund manager (DFM) or not, assessing and managing risk in the investment advice process demands a consistent, robust governance process. Take the time to do due diligence on any providers to make sure suitable procedures are in place in their investment management.
The DFM should support advisers with assessing and managing risk also. This usually takes the form of timely reporting and descriptive content on factors that affect your model/portfolios including macro issues, individual fund updates, market commentary and more.
Ensure that the provider is fully transparent when making any changes to the portfolios and provides you adequate information explaining reasons for fund switches.
This transparency is an important factor for having an effective ongoing relationship between you, your clients and the DFM. DFMs can have different levels of contact with the end investor, and it’s important to understand where you fit in the process.
Some DFMs will communicate directly to your clients (known as the ‘reliance on other’ model) while others will only communicate with you, meaning you are the primary service provider (agent as client). This has crucial implications on who manages the investment relationship with your clients and where you are positioned in the value chain.
As to your communication with your investment partner, check you have a single point of contact with the expertise required to understand the challenges of your firm and work alongside you to deliver better outcomes for your clients.
You should also have access to the investment team as you are essentially investing in the DFM’s specialist knowledge and expertise when investing your clients' assets through a partner.
4. Portfolios designed with your clients' needs first
Investment products need to be designed for specific target client groups, not only to achieve the best possible client outcomes, but also to comply with regulation (PROD, Consumer Duty). As such, it's essential that you partner with a model portfolio service that equips you with a suite of options to match your own firm’s target market assessment so that you have a wide range of investment products that matches your client base.
A DFM that provides this, along with key documentation to allow you to demonstrate continuing suitability, will help keep your investment advice process compliant and achieve better outcomes for your clients.
5. Considering term length
Variation in design doesn’t just extend to options for different risk profiles and costs, but also the time length the portfolio is intended for. In order for the composition of the recommended investment portfolios to meet the needs of your clients, risk appetite, investment term and personal financial goals of your customers all need to be considered.
Whilst investing in portfolios usually means investing for long-term returns, this can conflict with your clients’ current situation (e.g. age) or investment objectives, so to establish and maintain ongoing suitability, you should partner with a DFM that offers specific portfolios designed for different term lengths.
We believe this is a crucial consideration that a lot of providers don't cover. If you're not convinced, take a look at this article on the importance of term length in portfolios.
6. Adding value to your client relationships
The best MPS providers focus on bringing value to your investment advice process. There are a number of different ways a partner might do this for you. One way a partner can make an impact is through effective reporting.
You should check with MPS providers what type of reporting content is available and evaluate whether it is fit for purpose. You need it to be readily accessible and in a format that your clients can easily understand – engaging and jargon-free – not least as this will help with the customer support and customer understanding outcomes of Consumer Duty.
It’s critical for your business and your clients that you partner with the right model portfolio service provider.
In the ways listed above, a good discretionary model portfolio service will build their solutions around what you and your clients need, and help you build a more robust and compliant investment process. It’s also important to consider the type of relationship you want with a DFM, and how they will add value to improve your clients’ outcomes.
Performance may fluctuate, and we’re regularly reminded that past performance is not an indication of future returns, so there’s much more to finding the right investment partner for your business than looking at performance charts. Doing this is no guarantee you have the right partner for your business, as well as your clients.
Of course, it's important to remember that every firm is different, and what works for one business may not work for another. So be sure to find a partner that understands this, delivers on the key points above, and offers a wide range of ways to support you and your clients to help provide better client outcomes.
How can FE Investments help your business?
As part of FE fundinfo, we’ve used our experience of working alongside financial advisers for more than 25 years to develop an award-winning managed portfolio service that is expertly built around you and your clients’ needs.
We prioritise providing you and your clients with a service that can be depended upon, and we believe that understanding your perspective and that of your clients is essential.
This is a marketing communication, intended for financial advisers only. Not for use by retail investors. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. The value of investments and the income from them may go down as well as up and you may not get back the amount originally invested.