We’re selling time, completely free, would you like some?

Ok, that’s impossible (physically, plus you can’t sell something that’s free), and everything costs something, especially your time, you wonderful financial advisory business owners, builders of dreams, spinners of plates, pleasers of regulators.

Quite cryptic so far, so, in plainer English, let us make the case for freeing up the time you spend managing client investments, without comprising client outcomes, allowing you to focus on the critical areas of running a modern financial advice business where outsourcing is far less appealing.

A couple of questions:

Do you like managing investments for your clients? 

And, if “yes”:

Do you know for sure this is a service your clients value and appreciate specifically you doing?

If “yes” again, don’t stop reading but proceed knowing that you won’t like this piece! If you’d rather someone else – a specialist, a Discretionary Fund Manager, maybe several – took care of this specialised, highly skilled and often time-heavy function, you’ll enjoy this. 

Here at Parafinity we would argue that the role of financial planning is to develop a life long plan, a strategy if you will, to achieve the goals and needs of the client. Part of the strategy includes tactics, which will no doubt change over time. 

Investment management is one such tactic. Tax planning is another. Compounding growth is yet another. 

If we liken the role of the financial planner to a GP, knowing enough about everything that they can take a strategic approach and signpost to specialists when needed, we would suggest that you leave the investment alpha to the specialists (if you’re into that sort of thing), and you worry about the strategic planning alpha.

But why?

There are several benefits to outsourcing discretionary fund management:

• Recovering your time (researching, building, stressing about performance or wondering if your coverage is wide enough).
• Administrative efficiencies (let the DFM take some of the paperwork and all of the dealing!).
• Access to cutting-edge investment research, tech and knowledge. 
• Specialist guidance for – and often as part of – your own investment committee.
• Continual oversight of portfolios.
• Tighter risk management.
• Swifter dealing.
• Reputational protection. 
• Diversifying investment styles and philosophies. 
• More tailored portfolios and, therefore, more client-specific outcomes.
• Protecting your client relationships.
• Potentially better access to institutional pricing.
• Better segmentation of your client book – maybe the bespoke DFMs are for HNWs only, maybe you want to offer ESG only, or perhaps one DFM for ‘silver’ clients, another for ‘gold’, you get the picture. 

A lengthy list, and whether your problem is a lack of time, expertise, resource or wanting to improve your commercial outcomes, then there’s a benefit or two for you. 

A recent report in the FT Adviser highlighted research showing the benefits of outsourcing discretionary fund management:-

• 25% reduction in time spent monitoring the Centralised Investment Proposition
• 72% reduction in maintenance activities
• 30% drop in reporting compared to firms with an in-house service

The key to a successful discretionary fund management arrangement is enhancing investment outcomes for the client together with a better commercial result for the adviser, all underpinned by the various efficiency savings detailed above.

Diversify Your DFMs

Nowadays, it is commonplace for financial planners to have several discretionary fund management relationships as part of their Centralised Investment Proposition or Centralised Retirement Proposition. Thanks, RDR!

This provides a broad range of options for clients willing to take on varying degrees of risk with their investments. Everything from growth-driven technology buffs to those approaching retirement and looking for a degree of security – or a few challenges to tick off their bucket list!

While you can protect your firm’s reputation to a certain extent, we all know that you can expect some flak if you choose the wrong discretionary fund manager. However, in our experienced view, every risk has mitigation when it comes to DFM relationships. 

A common risk/concern is poor performance. There are excellent tools coming online to help you assess performance in various market conditions and, should preemption not be enough, ensure you can hire and fire quickly and easily and have a panel in the first place to spread your own commercial risk.

Tip Toe Towards It

We’re talking about diversifying before we’ve even covered how you get as far as having one DFM relationship. Quite deliberate! Best to head off the main fears early on. 

However, the key to successfully outsourcing a discretionary fund management service is being clear about what you provide, evolving the relationships, and having crystal clarity over the responsibilities of different parties. 

Take the time to ask yourselves what is most important to you and your business, and treat this as a project to be managed, with defined goals, outcomes, stages, and dates. What we’re basically saying is “Don’t just jump into bed with the first one to ask you to a seminar!”. However good the bacon butties may be.

As the advice sector en masse has grown its partnership with the DFM world, here’s a checklist for how you could do the same:

This is, of course, a hugely simplified checklist, and the devil is in the detail, detail which we’re experienced with. We’d love to chat to you about what specific questions to ask.

What Kind of Partner do you Want?

Broadly there are two ways to frame the relationship. 

Agent as Client (AaC)

With AaC in its most basic form, the investor has a contract with the financial planner (agent), who has an agreement with the discretionary fund manager (although by written agreement, the investor can be treated as a client of the DFM). The financial planner is front and centre of the relationship and is the client of the discretionary fund manager, arranging for the portfolio to be managed by the chosen party. Under this arrangement, the financial planner is responsible for producing the investment mandate and ensuring it is adhered to.

Reliance on Others (RoO)

The RoO arrangement is slightly more complex. Here, each investor has a direct relationship as a retail client of the DFM. This ensures that the financial planner stays within the relationship loop but shifts some of the regulatory burdens onto the DFM. 

Regulatory liabilities

When it comes to regulatory liabilities, they will vary depending on the arrangement.

An AaC arrangement may see the financial planner treated as a professional client of the discretionary fund manager. While they would still be able to take action on behalf of their client in the event of mismanagement by the discretionary fund manager, they may lose access to the Financial Ombudsman Service and cancellation rights.

The situation regarding RoO is slightly different, as there is a direct agreement between the client (investor) and the discretionary fund manager. The financial planner is still responsible for ensuring the discretionary fund manager suits the client. However, the discretionary fund manager is legally obliged to invest funds in line with the mandate and ensure the client is informed of changes in the traditional manner. 

Communication between client, adviser and discretionary fund manager

The line of communication is different for AaC and RoO arrangements, dependent upon individual agreements. With an AaC agreement, all communication from the discretionary fund manager goes to the agent (financial planner), who is treated as the client. This is then passed on to the investor. 

When there is an RoO agreement, the financial planner is usually kept in the loop concerning reports and potential issues. However, the discretionary fund manager can communicate directly with the client.

Safe custody of assets

There are two options when it comes to safe custody. Assets can be held in the client’s name or through a nominee account with a fund manager/third party. Where the agent is seen as the client, they are responsible for monitoring and checking safe custody records with the discretionary fund manager. Where there is a direct arrangement between the fund manager and the underlying client, the fund manager must liaise with the client directly.

Implementation plan

Whatever route you go down, everything comes down to trust with your clients. You don’t get a second chance to make a first impression when rolling out a new service. Consequently, the process must be planned, with many preferring a soft rollout before making the service available to a broader audience.

Soft roll out 

Financial planners tend to instigate soft rollouts amongst trusted parties, which allows them to obtain feedback and monitor the efficiency of the new service. Even if a soft rollout went relatively well, it is essential to scale up the relationship organically and sensibly.

Test cases

The introduction of test cases to the soft rollout allows financial planners to introduce what may be challenging situations to the new system. The idea is simple: test the new service’s boundaries and see how it reacts to specific scenarios that may or may not occur in real life.

Adjustments before full launch

This is the moment to make any final adjustments to the new service before a full launch, considering client feedback, test cases and the results of the soft rollout. In some instances, the service itself may be exemplary, but capacity issues may need to be addressed.

Review strategy

The regulatory landscape and client expectations are constantly evolving. So, even if the rollout of your discretionary fund management service has been successful, the job is not quite done!

Feedback from customers

It is still essential to ask for feedback. Even if the rollout has been successful, some of the changes may be cosmetic as opposed to fundamental, your clients will be a wonderful source of information on how it is really going.

Changing regulations

As we touched on above, the investment regulatory landscape is changing regularly, and it is crucial that financial planners and fund managers are up to speed. When instigating an AaC scenario, you effectively take the vast, vast majority of the regulatory responsibility. If you operate under an RoO arrangement, it is generally more balanced. This is always subject to change.

Any improvements to be made

Any improvements to your discretionary fund management service should benefit your reputation and attract more business. In practice, clients tend to prefer consistency and reliability. Consequently, rather than making changes regularly, if improvements are to be made, where practical, they should be made in one go. This brings us to the challenge of educating customers about the changes made and how they will benefit their long-term strategy.

Conclusion

In simple terms, introducing a discretionary fund management relationship creates two experts where there was previously only one, with huge potential benefits to the client. Financial planners can concentrate on looking at the bigger picture, while discretionary fund managers can focus on their skills, fund management. The range of discretionary fund management services today ensures that whatever your client seeks, there will likely be a managed option.

One note of caution, choosing suitable discretionary fund management third parties is the responsibility of financial planners. You can put some distance between yourself and the performance of the discretionary fund managers. However, there will always be a degree of responsibility in clients’ eyes.

If you’re a Financial Adviser looking to unlock growth with discretionary fund management, pop a time in our diary here to have a chat and see if we can help you.