• MI around distribution channels. How important is the adviser market to the firm?
• The structure of the firm and where the discretionary arm fits. Have there been indications of resourcing up the adviser support area or launching solutions aimed at the adviser market, such as MPS on a platform.
Investment approach
Using a DFM is, in essence, outsourcing some of the investment decision making to the discretionary manager. However, it is the adviser that makes the initial selection of the firm and it therefore makes sense to select a firm that has similar investment beliefs.
This will inevitably make for a much easier business partnership and understanding of approach, particularly at times of review.
The kind of questions to ask here may include:
• Investment philosophy
- active, passive or hybrid
- portfolio turnover
- collectives, direct securities or a mixture of both
- use of complex or complicated instruments
• Investment style
- risk targeted
- risk focused
- benchmark driven
- income portfolios, income or capital priority
• Investment process
- top down or bottom up
- manager driven or house view
- peer group review
- safeguards and governance (independent)
• Investment specialisms: for example ethical, Sharia or AIM portfolios
• Proof of expertise
- decision makers’ CVs
- past performance
- volatility
- asset allocations
- holdings
Terms and conditions
This is essentially what the client is signing up to and what they should expect. This would include such things as:
• Reporting frequency
• Reporting content (income tax certificate, CGT report, transactions, market report etc)
• Costs and charges
• On-boarding process
The costs and charges are a particularly difficult area to nail down. Most MPS solutions are fund based, and as such there are many potential charging points. The main ones are:
• Initial fee (although this is very rare these days)
• Annual management fee (and does this include transaction fees)
• Transaction fees if not included in annual management fee
• Charges on underlying funds
• Any other significant administration fees
• Custody charge.
Make sure you look closely at these charges. For example, there are some services that claim to have a zero annual fee. On closer examination, the portfolios are likely to be populated with internally run funds. All charges will be deducted from these funds.
This is not done to be deliberately opaque, in fact there are tax advantages to structuring this way. The key is these variations in charging structure do need to be borne in mind.
Finally, with regard to charges, many firms will entertain offering reduced charges to some adviser firms, usually with the hope of gaining significant AUM. It is always worth asking.
Service
Discretionary management, historically, has had a reputation for superior service. Oak panelled board rooms, meeting your manager over a nice lunch and glass of claret. This level of service still exists, but does tend to be at the private client, bespoke end of the market.
