If you are choosing to outsource to discretionary fund managers, you need to consider the process to be undertaken and the questions to ask potential providers to ensure best possible client outcomes, as Barry Neilson explains.


    Since the advent of the Retail Distribution Review, more and more advisers are choosing to use third parties to manage client investment strategies.

    These third party providers include asset managers, research companies and discretionary fund managers (DFMs) who can provide a range of solutions often aligned to client risk profiles.

    In a recent survey, Defaqto reveals that 43% of advisers are now outsourcing their investment proposition and this figure looks set to rise. Of those 43% of advisers now outsourcing their investment proposition, 72% are using discretionary management services, Defaqto reports.

    As a result of this growing trend, there has been a rapid increase in the availability of investment propositions in the market from multi-asset funds, manager of manager, fund of funds, model portfolios to fully bespoke portfolios provided by DFMs.

    The FCA is taking an interest in this activity and some of the more recent legislation indicates its expectations of advisers when moving clients into new investment propositions.

    With an array of DFM services to choose from, a key challenge for many advisers is how to select the appropriate solution for your clients. And in particular, the use of DFM services through a platform predominantly using model portfolios or multi-asset funds are on the increase.

    If you are undertaking a selection and due diligence exercise, you need to consider the process to be undertaken and the appropriate questions to ask of any potential provider in order to ensure best possible client outcomes.

    Nucleus’ newly-published white paper: ‘DFM due diligence: the questions to ask’ examines what good due diligence looks like.

    The paper looks at the legislation surrounding the use of centralised investment propositions (CIPs) and examines how model portfolios operate on platforms.

    The key areas which the regulator expects an adviser to consider and review for any CIP are:

    1. The CIP provider – including questions on the business, its financial stability and its cultural fit to your business
    2. Proposition – including questions on accessibility, investment process and approach and investments used within the portfolio
    3. Regulatory issues
    4. Charges
    5. Performance
    6. Service

    Although outsourcing investment risk to a third party may result in the reduction of some investment risk, selection of the provider and responsibility for this still lies with the adviser.

    Due diligence should be carried out on a regular basis as customer requirements can change, market conditions might vary and the DFM might update their proposition or perform poorly.

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