Discretionary fund management permissions are one way adviser firms can have full control of their investment proposition, advice process efficiency and client outcomes, but it requires a degree of scale to be an economically realistic option.
This is why, according to Mike Morrow, chief commercial officer at Parmenion, most adviser firms wanting to build the efficiency of discretionary models into their process will choose to outsource.
Morrow says: “Outsourcing to a DFM brings many benefits: reduction in cost and risk to the adviser firm; the ability to diversify across investment styles and philosophies to deliver appropriate client outcomes; and being able to concentrate on financial planning for clients.
“It also means the adviser can hold outsourced DFMs to account for investment performance and decouple that from the firm’s reputation and their client relationships.”
He says outsourcing to a DFM also enables tighter control of client outcomes because discretion ensures clients are in a defined model or mandate aligned to the advice.
“It reduces risk of poor client outcomes caused by multiple clients in multiple versions of models under advisory permissions. It ensures appropriate investment expertise and oversight, without the need to have this capability in the adviser firm, reducing both costs and risks,” Morrow adds.
“It also creates administrative efficiencies in firms who no longer need to secure client signatures and/or permission to change models or negotiate reasoning for changes, especially at times of stress.
“Advisers can identify DFMs with the right specialisms to best serve their clients, particularly around ESG.”
A study by DFM Copia Capital, carried out into centralised investment propositions, found that while having their own discretionary permissions originally drove efficiencies in advice firms, the additional administration and regulatory burdens of Mifid II have made them more time-consuming to operate.
Portfolio changes like rebalancing or fund switches require authorisation from every client invested in the portfolio, meanwhile it has been predicted the requirements of the consumer duty are likely to make things worse.
Robert Vaudry, managing director of Copia Capital, says: “While obtaining advisory permissions will make some of the CIP administration more straightforward by removing the need for individual authorisation to make portfolio changes, outsourcing to the right DFM provides access to the research and resources of a specialist investment manager focused on managing the client’s money in line with the agreed mandate from the adviser.”
Research from Copia also found that outsourcing to a DFM reduces operational and business risk. Copia found that outsourcing to a DFM led to a 25 per cent reduction in time spent monitoring the CIP, a 72 per cent reduction in maintenance activities and a 30 per drop in reporting, compared to firms running their CIP in-house.
Lewis Hamm, chief executive of investment management firm O-IM, says that one benefit of an adviser outsourcing to a DFM is that it eliminates conflict for the adviser.
