Many advisers, like stockbrokers in the past, continue to prefer the day-to-day activity of recommending individual trusts and funds to clients one at a time, and the connection to the investment markets that this conveys.
Why does recommending a model discretionary fund manager (DFM) make more sense for both client and adviser alike?
What is best for the client will, in the long and the short run, be best for the adviser, so there is a win-win when good investment outcomes grow more likely. This begins with accurate risk assessment.
Clients have a level of risk tolerance that will remain consistent over long periods. They will also have an individual loss capacity. Both tolerance and capacity can be reliably measured but these scores are useful when mapped to actual portfolios.
A DFM has the anonymised data of all their clients to help maintain these mappings, and to ensure asset allocation is consistent with the tolerance and capacity of each client segment. When changes occur, whether in asset class behaviour, fund performance, tax treatment or governance, an immediate change is made. A DFM investment team looks only at markets, year-round, hour by hour, giving continuity of monitoring assessment. This is a strength and major factor in achieving the right, final client outcome.
The reverse of this can apply with a client-by-client approach when demonstrating weaknesses under the heading ‘portfolio drift’. When the client is asked to approve each individual investment decision, it follows that clients may never invest optimally if they reject or modify recommendations. Equally, over time, recommendations accepted or rejected or not actioned in time can nudge the portfolio away from the optimal asset allocation.
Periodic withdrawals and additions of capital can have the same effect when modelling is weak.
At the heart of professionalism is a thoughtful, objective approach to the challenges faced by clients and a set of dependable solutions.
Generally this is met by segmentation of clients by size, or need. When a client is accurately segmented, a professional investment proposition will precisely, effectively and in a timely fashion adapt their investments to their needs. The speed of response, continuity of oversight and depth of research of a DFM tick all the boxes.
In a ‘one stop shop’, if the investment process goes wrong, it may not be addressed right away if embarrassment is the first reaction.
The demands of regulation not to carry out an activity without expertise is a powerful driver. Many would agree that tax and pension legislation are large enough subjects in which to achieve mastery, without having to cover the world of investments on top. Continuity of oversight is not only a matter of keeping on top of CPD and the day-to-day swings of markets, it is also about maintaining the ongoing research and due diligence endeavour of individual fund managers.
