Knowing whether or not you and your clients are getting good value for money from your discretionary fund manager (DFM) isn't always easy.
Like many fees in financial services, calculating charges for DFM services can be convoluted.
When it comes to making your choice on a DFM or reviewing your selection, it can be easy to default to staying put. Better the devil you know and all that.
But the DFM space is changing quickly, and advisers and clients are becoming much more cost conscious.
It’s also important to consider how you assess value, and going further than price versus returns.
Here are some of the factors worth considering when making an assessment of value, and when deciding which DFMs are right for your clients.
Like anything in life, just because something is cheap doesn't mean it is better.
Looking at the cost of a DFM, it makes sense to consider whether the firm's process builds value into their charges.
A DFM that takes a big fee which then doesn’t appear to filter through to quality teams of analysts and research may well be a red flag.
A lot will come down to what and how good their processes are, the strength of their analysts, and whether you believe they have a repeatable formula for future success.
Transparency in this process is also really important.
Your DFM's investment processes and ways of working should be a relatively open book.
Obviously it’s not possible to demonstrate how every decision is made, but knowing the rationale behind the investment approach is crucial so that you can know where your clients’ money is invested, and why.
Value for money and decent performance are all well and good, but the focus of the DFM also matters, especially when it comes to specific client goals.
Identifying clients' needs and assessing whether the DFM offers the right kind of products to meet those needs is central to DFM selection.
It's worth taking the time to understand the firm's investment beliefs, and how these then tie in with their decision making.
Perhaps one of the more contentious areas of DFM outsourcing is control over the client relationship, and the contractual arrangements between you as the adviser, the client and any third-party DFM.
A good DFM should be able to consult and discuss this openly, as well as the applicable contract terms.
Exit fees have become something of a battleground across the investment industry.
On the direct-to-consumer side, big players like Interactive Investor and Hargreaves Lansdown have chosen to remove exit fees, while other firms have held on to them. The FCA also abandoned its planned exit fees consultation in November.
Having exit fees is not ideal, but there is of course a cost of doing business and closing down the relationship.
But clearly onerous fees that patently intend to discourage switching away is a bit of a warning sign, so it's worth knowing what, if any, exit charges your DFM applies and how quickly you can switch away from it if needs be.
Performance can be intangible - even 'star manager' Neil Woodford could demonstrate good five-year performance at one point.
Judging the potential for your DFM to do what it says on the tin is about making a value judgment of all these factors, including investment performance.
Ultimately, performance should follow on from reasonable costs, strong working processes, transparency and conviction in the firm's investment beliefs.
If you're able to weigh up these factors, the value for money should present itself. If it doesn't, it might be time to look elsewhere.