Do you advise clients on investments or pensions?

Are you linked directly or indirectly to a Discretionary Fund Manager (DFM) in some way?

Is your business model one of placing business with one DFM? 

You should read this article (you should read all my articles though as they are Financial Services nuggets every one!) 

Back In March 2019 an article appeared in New Model Adviser….. https://citywire.co.uk/new-model-adviser/news/fca-to-scrutinise-advisers-relationships-with-dfms/a1210077?ref=new_model_adviser_business_platform_list 

Some of you may have read it, some may not have. 

Here’s the gist of what it said: 

“The Financial Conduct Authority (FCA) will look at Adviser’s relationships with Discretionary Fund Managers (DFMs) in its retail distribution review (RDR) later this year” 

The FCA and this article did not elaborate really, other than to indicate that it also felt consumers had difficulty in comparing Model Portfolios. That was a key word. Seeing as the FCA did not elaborate on the bit before concerning the link between advisers and DFMs we can only guess what they really mean here (but most of us can make an educated guess I bet) 

I thought about this subject recently in response to a question that was put to me and it was this relationship with a DFM that I felt could use some expanding upon, so bear with me as I try to put my thoughts down here on this particular subject….. 

DFMs used to be the exclusive playthings of wealthy investors and pension funds, you needed plenty of money to peak their interest. 

Times though have changed and those of us without country estates and millions of pounds recently found that we could access a DFM and potentially benefit from what they do! (Yay for us poor working souls!) 

Many of us may want to use a DFM for the following reasons: 

1. They can manage a portfolio for us more actively and with greater finesse than most of us could ever do (after all it’s their job!”)
2. They can make decisions for us without having to get our permission every time
3. They can give us access to investment types or funds that we might not be able to on our own
4. They can manage a portfolio to a risk appetite way better than most of us could 

So a DFM seems to be kryptonite to retail investing woes right? 

Not quite…… 

True for some people (especially still those with larger funds or complex investing needs) a DFM can deliver the style of investment management they need. They can react swiftly and run a portfolio efficiently, with the client aims in mind, this might be to a risk budget or a growth/income target (CPI + 2% for example) they are not however for everyone and should not be used as a "one size fits all" solution. 

For some, investing in a DFM is akin to buying a Porsche and never taking it out of the garage, or driving it at 30mph…..it’s a waste of time and money (I hear that a Porsche is not cheap!). Often DFM's are used to access what I would describe as standard solutions, with copies of solutions available easily being "badged" as sophisticated investments. 

It doesn’t matter what gizmos the thing has if you can’t or won’t use them then why on earth have them? 

It’s a little like the SIPP issue that I have, why sell one if someone doesn’t need it? Not everyone is going to use the wide investment powers that they have and so why pay for something you won’t use? 

Selling a DFM to a client because of what it does rather than what the client wants to do also seems silly. 

To my mind (and I have used DFMs in DB schemes very effectively in the past) we should only be recommending a client use a DFM if they have some or all of the following objectives: 

1. They are a sophisticated investor (they don’t just have an ISA and the pension pot you are looking to transfer!) and this can be evidenced
2. They have a reasonable level of assets to invest (I am of the opinion that anything less than £250,000 is less than ideal)
3. They have a need for really active management (what is this then you ask?)
4. They can afford to loose a reasonable amount of the funds over the shorter term.
5. They have other assets to rely on in the short term if needed 

There are probably more reasons that you can come up with and that is of course good but what I am trying to say here is that a DFM does not fit everyone, goodness in my 25 years in Corporate Pensions and even with hundreds of £millions to invest, a DFM was rarely justified. 

If then you have a client with a lot to invest, evidence that they are someone that can understand the workings of a DFM and these workings can directly match a need or two of theirs, then a DFM can be a useful (if expensive) tool to help them achieve their investment and/or income goals. In fact in recent years, the cost of a DFM has come down and made it more accessible to more investors. 

If you follow your basic adviser processes well, you can easily establish whether a DFM can fit your clients objectives. Remember, you must match the client's objectives to the solution, if the solution can't match their objectives, then you shouldn't be recommending it. But if it can fit then it can do a good job for your clients. 

If though, you are advising clients to transfer into DFMs with no real evidence of a need for such a service or very small pots of funds then it presents the question of whether you really are giving the client “Best Advice” as you will see in later weeks, one of the cornerstones of my regular articles is “Justification”, the need to be able to evidence the reasons for advice and that those reasons match a logical and legitimate need of the clients. 

For example “capital growth” is not a justification for investing into a DFM where a client has an existing investment (ISA or Pension for example) as they already have access to that, so what else have you got?   

A DFM has the ability to change the entire portfolio for a client in order to meet that client’s goal without needing to get permission every time, where other funds do not. If the manager replaces a fund then no client permission is required, they can react quickly in the interest of their clients. 

Let’s look at a client that needs income in retirement (pretty standard), most will come to you with a £ need and you'll analyse what they have and using a good old fashioned deterministic illustration (based on fixed assumptions) show them what they could expect all things being equal. 

But the trouble with this approach is that the end result and the journey there is often left to chance. 

Over time, if the investments are left unchecked they can become unsuitable, even going as far as a manager constantly under-performing and losing the client money BUT because no-one is managing the funds actively there is often a high risk of things not going to plan. This though does not have to be left to you, the adviser, few of you can spare the time to carry out the constant research and monitoring of all your clients to make such a thing realistic. 

That is where the DFM can come in.... 

They can take away from you and the client, the research, the constant governance and monitoring, the re-balancing of portfolios, the removal of under-performing managers and in general, the running of your client's money, to meet their own objectives. 

BUT here comes one of my “buzz words”.......you must demonstrate they are right through research and DILIGENCE, what we are soon to introduce will help immeasurably with that for you! Yes IFAC are developing some tools that you lovely advisers will be able to use to help you recommend such a solution to your clients, we also may even be able to offer some sort of additional tools to help you place it! (oops I have said too much)

Watch this space at IFAC for some exciting developments to help you, our members, in this complicated but exciting area.