There have been a couple of reports published that, in headline terms at least, have painted a rather negative picture of the discretionary service industry.
In actual fact, when you look at these reports more closely, they are simply highlighting some of the challenges both advisers and discretionary firms face when publishing responses to due diligence requests.
So what is the role of the financial adviser and what is the role of the discretionary fund manager (DFM)?
In the brave new world of post-RDR advice models, there are an increasing number of advisers who accept that their role is tax planning, product selection and ensuring good client outcomes by focusing on their client’s financial needs.
Increasingly, financial advisers are outsourcing the investment process that underpins delivery of good outcomes either to a third party or to a dedicated subsidiary of the adviser firm.
So, what is the role of the discretionary manager? Well, historically the discretionary manager has been focused on the individual client, ensuring that the mandate they follow meets the needs of the client and delivers the outcomes they expect.
Although this is a bit of a generalisation, this usually means establishing the client’s goals, investing to achieve those goals by taking as little risk as possible and protecting the downside. This means that risk is a prime driver, with return being important, but secondary. This philosophy of investing has been adopted not only by bespoke portfolio managers but those managing the more ‘off-the-shelf’ managed portfolio services.
It is not necessarily the job of the discretionary manager to produce alpha. It is the job of the discretionary manager to deliver the outcomes the client expects. To achieve alpha means taking positions against a benchmark and this means taking risk that is not warranted.
Many advisers have lived through an era of fund picking, star managers, the search for outperformance and an over-reliance on peer group comparison
There is a genuine worry by some discretionary firms that standardised performance will not necessarily reflect how they approach portfolios and many still publish performance in such a way that best reflects the mandate they are following. Of course this makes it difficult for advisers to easily compare propositions, but equally it is understandable from the DFM firm’s point of view.
Nonetheless, advisers do need to make these comparisons and looking at a history of returns in conjunction with the declared mandate does provide useful insight.
While there is at least some justification to performance not being produced in a standard format, there really is not any excuse for facing the same difficulties in getting to the bottom of the true cost of investing through a discretionary service. As with fund annual management charges, the DFM headline rate is not usually a real reflection of the actual cost. It is very important that advisers closely analyse the cost structure.
