citywire dfm article 061014
DESCRIPTION
Outsourcing can clinch client loyalty when the DFM is the right fitTRANSCRIPT
ADVISER INSIGHT 27
citywire.co.uk/adviser I 6 October 2014 I New Model Adviser®
ALLAN STOBOAGL Wealth Management
Advisers who outsource investment to
discretionary fund managers (DFMs)
are often criticised for jeopardising
their client relationships and failing to
offer everything in-house, but there are
many positives to using a DFM.
When we first set up the firm,
Glasgow-based AGL Wealth
Management, in 2009 we decided to
outsource to DFMs, where appropriate,
for two reasons:
l First, my colleagues and I, all of
whom had worked at Royal Bank
of Scotland Private Bank, had
experience of dealing with
high-net-worth clients and
outsourcing to DFMs.
l Second, my colleagues and I
specialised in wealth planning, rather
than investment and portfolio
construction.
Answering the outsourcing critics
We felt outsourcing allowed us more
time to see more clients for longer to
strengthen those relationships.
Although we use the term
outsourcing, we do not believe we are
passing clients onto a third party.
I think of it more as insourcing, as we
bring the DFM into our business to
invest our clients’ money.
Clients place great value on the time
we spend with them, and by using a
DFM, we free up our time to focus on
doing more of that.
Creating portfolios that meet
different client needs is tricky. It takes
time and expertise, and can expose the
business to additional risk and costs.
Some advisers think clients may look
more to the investment manager for
advice because they are running the
money. However, we set the
boundaries from day one to ensure all
three parties know their position within
the relationship.
Another criticism levelled at advisers
who outsource is the added cost to
clients.
Bespoke portfolios can be expensive,
but they are often used for a specific
reason that justifies their charges, such
as capital gains tax, stock exclusion or
sentiment. Advisers can also reduce the
cost of outsourcing by using model
portfolios or unitised solutions.
Creating a robust offering
If you choose to take the outsourcing
route, picking the right DFM is an
important consideration. We currently
have eight investment firms that have
passed our due diligence process and
offer us a range of solutions covering
bespoke, model portfolio and unitised
DFM solutions.
Our process for selecting a DFM is
robust. We start by identifying DFM
firms in the market. We then apply
filters to reduce this to a manageable
size. Some of the appropriate filters
are: is the DFM a contributor to Asset
Risk Consultants and/or Private Client
Indices; what level of assets under
management do they have; and what
type of Sipp and offshore
bond panels are they on.
These DFMs will then receive a
questionnaire and be evaluated
before we create a shortlist.
We will meet with the managers at
their offices before selecting a panel of
DFMs. The panel is maintained through
quarterly monitoring, assessing
performance, volatility and risk, costs
and service.
Finding a good fit
We are keen to have a range of DFMs
that all offer something different. Some
will offer lending services, while others
allow access to them via a unitised
solution. It is important that some
DFMs on our panel have a local
presence.
It is not always about the amount of
funds DFMs have under management.
We try to match the DFM to our
business, for instance sharing the same
values and organisational
characteristics.
From an investment perspective, we
will examine the DFMs’ strategy and
preference for investment instruments.
Some will focus on passive vehicles to
keep costs down; others will use
collectives; and some will offer direct
equity exposure or use investment trusts.
Our investment oversight committee
meets each quarter to discuss the
DFMs in detail. It scrutinises service,
performance, risk and charges. We also
meet with DFMs that we are not using
to find out more about what they offer.
Matching clients’ needs
With regards performance, we find out
what our clients’ expectations are of
good and bad performance, and what
level of return is required to meet their
goals.
Cash plus inflation can be seen as a
good sign. However, if a client is
prepared to take a degree of risk, it is
important they are rewarded
accordingly. Alternatively, cash plus
inflation may not be adequate to meet
a client’s needs.
We benchmark the DFMs against a
range of pre-constructed indices or
portfolios we have built that mirror the
asset allocation and volatility of the
various solutions. These are
constructed using a range of indices
and allow us to see how the market has
performed neutral of costs and
whether the DFM is providing alpha
and value for money.
Allan Stobo is a senior wealth manager
at AGL Wealth Management
Far from jeopardising client relationships,
outsourcing investment through a robust
process can strengthen them by freeing up
advisers’ time and producing better outcomes
OUTSOURCING CAN CLINCH CLIENT LOYALTY WHEN THE DFM IS THE RIGHT FIT
Clients place great value on the time
we spend with them, and by using a
DFM, we free up our time to focus on
doing more of that