1. How to divide up responsibilities between an adviser and a DFM
2. How DFM offerings can fit in with platforms and CRM systems
3. Creating and carrying out a due diligence process for selecting a DFM
PRESENTER: Well, Andrew, why should an adviser outsource to a DFM?
ANDREW: Really good, fundamental question. I think it’s all about two fundamental economic aspects. One is the division of labour and one is economics of specialisation. The professional adviser is a general practitioner and calls in a specialist when they need: that specialist (DFM) has the resources, from which the adviser can draw upon for the bespoke portfolio service. The individual investment manager assists the adviser in meeting the client needs. And I think what’s really important is firms that use understand what they do, but they also understand what it is they can’t do. In a sense the good firms recognise what they can’t do, and they outsource it. And that’s really the crux of it.
PRESENTER: What are the benefits of using a bespoke solution, rather than just buying a managed fund or a model portfolio?
ANDREW: I think there are lots of solutions out there, and it’s very much about horses for courses. We have unitised managed solutions, and we have segregated bespoke solutions, and in fact we have segregated model solutions as well. So it’s about service, it’s about getting an individual investment manager providing an individual portfolio for their client. And in addition with the bespoke service, as well as with the managed portfolio service, we provide a feed to adviser’s CRM, which assists in the efficiency of their business management.
PRESENTER: If there are all these different solutions out there, very top line what are some of the things you should think about when you work out whether a DFM is right for you or a fund of funds or a managed fund?
ANDREW: There are clearly a number of things, and we’ll cover them. You need to consider the structure of the underlying investment. What is the tax basis? Is it a unitised structure, is it a segregated structure? I think you need to consider personal service, the circumstances of the client, timelines, all sorts of areas. What values does the client have? Do they value a relationship with the investment manager? Are we working in harmony with the professional adviser to meet the client needs? There are lots of considerations, but in essence the bespoke service comes down to this very personal service. It’s the personal shopper in the high street, essentially.
PRESENTER: Well if you’re offering lots of personal service to people, how do you ensure that all clients are treated fairly?
ANDREW: As an industry or as a corporation? As an industry it can be challenging, I think, and I’m not sure whether bespoke service is always entirely bespoke. Actually I think it might be an element of colouring by numbers or glorified relationship management in some cases. But from our stance, we start with a centralised investment proposition for all of our services. And we provide tolerance limits for the investment managers to work within. So that they can take the client’s circumstances, combined with our guidance portfolios, and bring the two together to create a portfolio that’s applicable to those clients’ individual personal circumstances. So it’s about taking the corporate intellectual property, taking the personal requirements, and then mixing the two together to provide something bespoke for the client.
And a common misnomer is DFMs being referred to as unit trusts managed on a discretionary basis; actually the core of what we do is a bespoke investment management service. And that’s the key.
PRESENTER: Well they often talk about investment as risk and reward. You’ve talked about the reward side there, but how bespoke can you get it when it comes to managing risk for clients?
ANDREW: You can get it as bespoke as you like. What we’ll do is we’ll consider the range of assets in the marketplace, and we’ll have some low risk assets mixed up with some high risk to get a medium risk. So it’s about achieving that diversification. And I always talk about having a nice long seesaw, rather than a very short seesaw, so you’ve got room to manoeuvre to respond to the market conditions. So it’s important to have some nice low stuff which will respond to market conditions in one way, and some higher risk stuff which will respond to market conditions in another way.
PRESENTER: Well when it comes to outsourcing, one of the lines always given by product providers is advisers have got lots of time spare, left over. In your experience what do advisers do with that time, and how can they use it positively to help their business and their clients?
ANDREW: OK, good question, and this is really important. And it was formalised by the advent of RDR roughly three years ago. And this is about demonstrating and justifying the adviser charge to their clients, and demonstrating to the client what it is they do for the money they’re charging. We’ve been working with IFAs for 10 years plus. In the first five years of those we were lucky enough to have around about £600m of new business introduced to us by professional advisers. In the first five years, so having had time to consider whether it adds value to their business, in the first and most recent five years £3.5bn of new business has been introduced by professional advisers. So something must be going right. Six times as much new business has been introduced by professional advisers in the last five years, as opposed to the five years previous to that.
So in answer to your question they are spending time with their clients. They’re spending time working with their clients, adding value to their client relationship, and not actually thinking about the day-to-day investment management responsibility, which is another role. It’s a specialist role where they bring in a specialist, because they’re providing generic financial advice, helping those clients meet the objectives on the short term, the medium term and the long term, to provide them with independent financial circumstances at and beyond retirement. It’s about looking after the client. The client is at the centre of everything our advisers do and everything that we do.
PRESENTER: So what sort of support should an adviser expect from a discretionary fund manager?
ANDREW: The support can be substantial but should be specific to them, and it’s about a discussion, what are they looking for? As an industry we’re very keen to support the community, and as a business we’re keen to support the individual business. So we’ve published a number of documents and commissioned a number of publications. One of them is increasing the value of your financial planning practice, another one is realising the value of your financial planning practice. We’ve been distributing copies of the client-centric financial adviser. Financial advice is going through a substantial evolution, and we are there as a provider to support the community in the provision of sound and solid financial advice for their clients.
PRESENTER: But some might say well that all sounds great in principle, but all adviser firms are different. Can you really provide each of them and their clients with a bespoke service?
ANDREW: People. We have a lot of people. We have a lot of investment managers, and we provide the resources. We have teams in London; we have five teams in London. We have another seven teams around the country. We have 60 investment managers in the UK providing a bespoke service.
PRESENTER: And where’s the proof rather than the assertion that DFMs add value to a client’s portfolio rather than simply adding cost?
ANDREW: OK, I think this comes down to the stats I mentioned earlier, which is the level of support that we’ve received from our community, our supporters, our introducers, that they continue to use us. What I’ve found in this industry – I’ve been in this industry for 20 years – is that firms start off going about the process of beauty parading. And they may take a client out and meet three investment managers, and they may do that for a period of time, could be a year or two. And after a period of time they actually start using or doing all three elements of their acronym, which is independent financial advisers, and they start advising their clients and saying you know what, I like these guys, you should meet these guys, if you don’t like them we’ll go and take you to someone else, but let’s not waste each other’s time because it’s costing you money. And what you find is introducers or beauty paraders start becoming serial introducers.
Now, I’ll ask you the question why would that be if it didn’t add value to their client’s circumstances? Because they’ve got to know what we do.
PRESENTER: And so how mainstream would you say outsourcing to DFMs is these days?
ANDREW: I think we’re still in the early adopter stage of the marketing cycle. I think we’ve had innovators. I think the early majority is around the corner.Stats tell me that around about 50% of the adviser community outsource some or all of their investment management services. There’s 50% that don’t, and of the 50% that do some or all is quite relevant. I think in many cases it’s more some than all. But I think the recognition of the specialisation and diversity is really important, and that advisers have a really important role to play. And it’s recognition of our individual roles that is so important. The GP and the specialist working together to meet the client needs at the end.
PRESENTER: You’ve mentioned a couple of times this importance of the partnership between the adviser and the DFM. I wanted to look at that, the division of responsibilities. Who decides what that division of responsibilities is between the adviser and the DFM?
ANDREW: The adviser. It’s about how the adviser wants to work. We work with the adviser to identify how best they want to work. Some advisers we won’t, they don’t want us to meet the client at all. And others they welcome us to meet the client, they recognise we don’t manage money, you do it and meet the client and let me know how it goes. So it’s entirely up to the adviser.
PRESENTER: But given the number of clients you work with there must be some fairly set patterns of how advisers like to do things. What would some of those be?
ANDREW: OK, so from an industry point of view I think it has to be about the adviser. I think the industry have to recognise that the adviser is the industry’s client, and is introducing potential clients with investments. And so we have to listen to our clients.
PRESENTER: And who should conduct suitability assessments for clients?
ANDREW: Really good question. I think there’s two elements to suitability. As an industry I’m not sure that is the feeling throughout, but I believe there are. One is suitability of investment management – that’s what we do – and one is suitability of advice. And the adviser takes responsibility for suitability of advice. And so with the investment management, to use an analogy, we make sure what’s in the tin is what’s on the tin. And the adviser makes sure the client gets the right tin. And we make sure that we maintain what’s in the tin is what’s on the tin, and then the adviser assesses the client’s circumstances, their attitude to risk, their capacity for loss, their circumstances, their objectives, identifies the correct tin, the correct portfolio for their circumstances.
PRESENTER: So ultimately you’ve both got a part to play in the process – the DFM and the adviser. Ultimately whose client is it?
ANDREW: Ultimately it’s the adviser’s client, but it is also the client of the DFM. What you’ve got to be really careful of is ensuring they don’t work with a firm that not only does suitability of investment management but also takes responsibility for suitability of advice. And so they start treading on the adviser’s toes. And that’s something that they are rightly wary of. And it’s important that we have our role and the adviser has their role and we work together to meet the client needs.
PRESENTER: And how do you ensure that the client, the adviser and the DFM who is running the portfolio have all got the same understanding of what the client’s attitude to risk is, what their objectives are?
ANDREW: Firstly, we have a very clear and considered risk overview of an objective, description of the objective of the portfolio, be it a managed portfolio, managed segregated portfolio or a bespoke portfolio. But most importantly, and this applies to bespoke certainly, is we’ll resort to traditional values – traditional business values, which is that we talk to each other. And actually we have a meeting with the client. We discuss what it is they’re trying to achieve, and we leave that meeting with a mutual understanding of what we’re going to do for them, what they’re trying to achieve and what our responsibilities are. So we resort to just the fundamental basic traditions of conversation, because I think it’s really important.
PRESENTER: Just generally if you’re an adviser and you do have a relationship with a DFM, how often should you be in contact with them in the course of a year? I mean would you recommend people do this quarterly, half yearly?
ANDREW: I think probably early stage you might want to do it quarterly. You may be a little uncertain, you may be a little bit nervous, unsure. This is a new endeavour and so you want to go and make sure you’re doing the right thing for your client and everything’s being represented properly. Over a period of time it may go to six monthly, and you may arrived with your client on an annual basis and you may do it six monthly. The efficiency, the time efficiency on this is very important, because actually you can do reviews on a number of clients in one sitting if you like, one meeting. So the adviser can arrive, talk about their individual client’s circumstance, and then move on to the next and the next and the next, which is very efficient from a business point of view.
So I would say probably six monthly, and I think communication on the telephone is very important. Our investment managers will have conversations with some of our advisers on a weekly basis. Some of it will be a monthly basis. It’ll be as is necessary and as the relationship requires. Some of the advisers are busy and you know what, they’re confident and so they don’t really need to have that communication. So it comes down to the individual requirements of the investment manager, talking with the financial adviser.
PRESENTER: And in your opinion should a DFM ever have direct contact with an adviser’s client?
ANDREW: Yes. They are a client of the DFM, but I think they need to make sure that the adviser is aware. And so it’s about communication with both. You can talk to the client, no problem at all, but just keep awareness there. There are challenges in the market we see, where some DFMs feel that actually they want that client. And that can be a danger and we have to be careful of that as an industry because otherwise our supporters will lose confidence in us as an industry, I think it’s important.
PRESENTER: I suppose one element of independence a financial adviser can have when it comes to DFMs is how easy it is to move the assets away from a DFM. How easy should it be?
ANDREW: Very, it should be as easy as making a call and an instruction being carried out. And nothing more complicated than that. The importance is to ensure that as a firm we buy liquid assets and we don’t buy anything illiquid. And that’s crucial, but yeah it needs to be accessible, absolutely.
PRESENTER: And how important is it that the DFMs have got access to platforms, because so many advisers buy funds off platforms these days?
ANDREW: Well I think the point is that so many do, and so from a demand-led industry if you like it’s very important. And we are available via a lot of platforms as are our competitors. I have a challenge about platforms in that platforms in my mind facilitate advisory. And they allow an adviser to buy and sell on behalf of their clients on an advisory basis. However I also think, and I would as representing the investment management industry and a firm, I also think that advisory is inefficient.I think it’s a little bit like a kitten with a ball of string. So I don’t advocate advisory. And if an adviser chooses to go down the route of discretionary I would question why they would want to use a platform, because they’re not using that functionality.
In addition to that the FCA have suggested that advisers may want to segment their client bank into different segments, and they’ve also suggested that different segments may appeal to different platforms. And so you may as an adviser work with maybe two, three or even four platforms. Now I’m an advocate of a business having a single heart. I think it’s fundamental. If you’re dealing with four platforms you don’t have a single heart. Your single heart as a financial adviser should be your back office CRM system. We feed our valuation straight into the CRM system. The CRM system costs pounds per person, not bits for funds under management. We feed our valuations straight into the CRM system, and in fact the adviser can then take that CRM system, can create a client portal where the client can then logon to the adviser’s website and see all their client’s circumstances because they can get feeds from Yodlee.
So I think platforms are in demand, but I’m not entirely convinced the home of a discretionary sevice is within a platform – I think there’s other routes as well, there’s alternatives – and I certainly think that with a bespoke portfolio service, it’s very difficult to be available for a platform. If there’s 10 platforms you’re using, you’ve got to have 10 screens if you’re going to make sure you’re going to be working in a TCF basis.
PRESENTER: You mentioned platforms there, but I mean in a world of ecommerce and where things like robo advice are growing, how well does a DFM proposition fit in with all these new ways of communicating with businesses and clients that we’re hearing about?
ANDREW: As an industry, and that’s a financial adviser industry and the discretionary management industry, I think probably it’s about people. And so I think we’re probably a little bit behind the curve on electronic ecommerce. However, I also think that robo advice is an oxymoron. I think the two don’t go together, I don’t think they fit. And so over time and over the next three years I think we’re going to see huge developments in what it is that our industry can provide, the assistance we can provide the advisers in streamlining the process. I think a lot of it’s administration and process, and that’s a historical factor. It’s legacy that we all have to take responsibility for.
So I think we’ll see huge developments in that area. And one of those developments is the electronic feeds into CRMs. I think the CRMs are taking more responsibility in providing client portals for the advisers to be able to demonstrate value to their clients. And it adds huge value from the client point of view, to see all their assets in one place, this consolidated view is very powerful and it’s available now. And we feed the CRM now. The online applications and the like are probably not as efficient as they could be, but they’re coming.
And in fact as far as the CRMs are concerned we’vewe’ve taken a step and we’ve just hired an individual to go and assist the IFA community in making better use of their CRMs. So dedicated to something completely irrelevant to ourselves, but dedicated to our adviser partners to assist them in making their businesses more efficient.
PRESENTER: So when it comes to the CRM systems, and there’s quite a lot of them out there for advisers, how much time do you think DFMs should spend getting themselves plugged into those, and how much time should they spend trying to plug themselves into platforms?
ANDREW: So market has led with platforms. And so I think the platform route is a way the market’s gone. And it’s about the business decision. There are some key CRMs out there, and I think you’re not going to be involved with every platform, and you’re not going to be involved with every CRM. But certainly from my standpoint, you know, there are four organisms on this planet that have more than one heart. An octopus and a squid has two, a hag fish has three and an earthworm has five. Only four organisms. I think business should follow that natural lead. I think business should follow that lead from nature and focus on having a single heart within their business, and hence my support of the CRM because I want efficient businesses. In the words of the cider maker, why wouldn’t he fertilise his apple trees?
PRESENTER: And moving on then to due diligence, I mean earlier this year the FCA issued a report highlighting the importance of due diligence. How do you suggest an adviser goes about conducting it, I mean both initial and ongoing when it comes to a DFM?
ANDREW: Well I think it’s been a challenge. But they need to do some research, and they need to start from a very long list and get to a shorter list, and end up with a firm they want to work with for a particular client. And it may be a number of firms they want to work with for different segments of clients, but they need to start with some probably binary evaluation.
PRESENTER: Well you create your spreadsheet and you put all those DFMs down one side, what are some of the things you should be looking at across the top of the spreadsheets so you work out whether those providers provide for you?
ANDREW: So these are headline subject areas. And we’ve done a lot of work on this as a business, but I think as an industry and as you rightly say the FCA have focused on the importance of due diligence of DFMs in January this year. And I think it’s absolutely crucial. It’s no longer acceptable for an IFA to turn around and say the reason they use a DFM is because their kids go to the same school. That doesn’t work anymore. You’ve got to demonstrate and undertake proper due diligence. And we’ve worked very hard as an industry to enable some independent evaluation of our industry.
So for example Defaqto provide evaluation of product and services. And you can do your research and we’ve got lots of DNA available on all the different DFMs on all the different services and vehicles available. You’ve got the private client indices available through Asset Risk Consultants that provide details of performance. And in fact more recently a couple of months ago The FT published some performance data in their weekend supplement that is robust data and can be used to evaluate from a headline level whether a firm is competent, is generally competent or not. You’ve then got what I call below the waterline. So Threesixty as a compliance outsourcing company have gone into I think it’s 16 DFMs, and have provided some reassurance to the marketplace that these guys are fit for purpose. And that’s what I call systems and controls below the waterline.
And then finally and most recently, and I’m very excited about it, because it turns the independent data from a three-legged stool into four pillars which are much stronger and much more robust, is that AKG have published and undertaken some research into DFM process and financial strength. And they’ve provided a rating akin to the ratings that AKG provided for more recently platforms, and many years ago with profits and in between life companies and pension funds and the like, they’ve now focused on DFMs, and there’s a number of firms that are participating in that research, which allows the IFA to have some reassurance of the firms they’re dealing with.
So those are four independent pieces of research that are available. And if you just take those pieces of information and actually just consider has the DFM partaken in it? You don’t even have to worry about the results. So for example the asset risk consultants’ private client indices, you might want to consider the differential between a founder contributor and a subsequent contributor. Does a firm that embraces the idea of performance transparency deserve credibility for embracing that at outset? You know what, I think probably it does. And so you give them an extra point. And very quickly you get a binary spreadsheet, and very quickly firms fall off let me tell you.
PRESENTER: So you’re saying don’t, take other people’s data but don’t rely on it wholeheartedly, put your own overlay over the top. Ultimately it’s got to be your process as an adviser.
ANDREW: Well the FCA have been very clear: it has to be the IFA, the professional adviser’s process. It must be the professional adviser’s process. But you can take independent research. But we provide data, because we think it’s helpful and we want to help our community. We don’t want them to spend time researching the marketplace if we can do that for them and then pass them that research. But we have to source it, and at the same time independent evaluation is available as well. So take it as you wish, but you can’t rely on us to tell you about us – that’s the key.
PRESENTER: Wouldn’t the FCA look at it and say well a product provider would want to provide lots of research to an adviser, because it’s in their interest? I mean wouldn’t the FCA look at that rather sceptically?
ANDREW: I don’t think there’s anything wrong with providing information; it depends what the professional adviser chooses to do with it. So we will fill out an in-depth due diligence questionnaire about us. But to compare one due diligence questionnaire that may be 30 or 40 sheets with another from another firm is just too challenging, it’s too difficult. So start binary, get independent evaluations that have been produced by independent firms, use that to start with, and then get a shortlist. And then go and meet them, ask them your own questions and make up your own mind.
PRESENTER: If you’re an adviser how much cost should you be mentally putting aside to go through a process like this, both in terms of time and perhaps money if you have to buy in some of these reports from outside?
ANDREW: So a lot of them are paid for by the industry, so you don’t have to buy them in. Firms will outsource the due diligence process. I’m not sure it’s necessary, because these independent reports are available. And actually a binary spreadsheet can get you to a shortlist of half a dozen firms and then you go and meet them on behalf of your clients. And so the cost can be evaluation. There is an upfront cost, but what you’re doing is you’re investing in your business because you’re freeing up your time to then focus on your client needs. So there is an element of let’s invest to start with before we go ahead and focus on what we’re good at, which is providing generic financial advice to our private clients.
PRESENTER: And in terms of a time budget, how long should advisers be looking to put aside, roughly speaking, if they’re going to start going through this due diligence process of choosing a DFM?
ANDREW: We published some stats on this actually, some guidance in our recently published seven steps, suggested seven-step approach to DFM due diligence. We’ve got to remember that the initial research applies to all clients. And so actually could be offset against all clients. And so it’s very efficient once you’ve done it. I would estimate that somewhere between 30 and 60 hours initial research would be required. And on an ongoing basis look, you’re going to meet the investment manager twice a year, you’re going to do some evaluation, you’re going to check the portfolio value, you’re going to check the portfolio makeup, you’re going to do some other research getting third party documentation together, updating the spreadsheets etc. So probably another 30 hours a year probably, on average 30 to 50 hours a year, which can be offset against all the clients that have been introduced to that service. So it can work to be really quite an efficient approach actually.
PRESENTER: Well Andrew, we’ve talked through a lot in the last half hour, but if you could leave us with your three key points to take away from this what would they be?
ANDREW: Firstly I think it’s really important that professional advisers and DFMs focus on, or maintain our focus on, the client. At the end of the day it is about the client and assisting the client in meeting their objectives over the short medium and long term – that’s absolutely fundamental. And I think it’s really important to recognise that if we focus on meeting the client needs, then you know what, we’ll all do OK. And that’s absolutely fundamental. In addition, why you would want to outsource to a DFM, I think it’s really important to consider isn’t it more preferable to a professional adviser to be holding the investment gun and pointing it at a third party, rather than having the client pointing that gun at them. And by delegating the investment management responsibility what you’re not doing is backing your business on the strength of your investment prowess. Because at some stage it may go wrong, so I think that’s really important.
When you’re picking a DFM I think it’s really important to identify a firm that is capable, and that encompasses a whole myriad of stuff. But I think they just have to be capable and dedicated and committed and all those words that represent a firm that is actually looking to create and add value to a client’s circumstance. And I think it’s really important as well that as industries we work together for the mutual growth of each other. So I’ll come back to my cider making analogy. I think as an industry as the cider maker, we would be fools if we didn’t fertilise our apple trees because that is what is ultimately going to support our industry. So we are backing the professional adviser community. The professional adviser community are supporting us, and we need to work together for mutual benefit, and actually ultimately for the benefit of the end client – that’s the key.
PRESENTER: We have to leave it there. Andrew Denham-Davis, thank you.
ANDREW: Thank you very much.