DFM and good communications

24 March 2016

Fraser Donaldson – Insight Analyst (Investments)

Most financial advisers will tell you that the foundation of a successful client relationship is good communication. At the heart of that good communication will be a good personal relationship. Getting to know the client, understanding their requirements, listening closely and being able to deliver exactly what is required makes for a long term mutually prosperous and effective ‘partnership’.

Advisers, when dealing with any product providers, would expect the same approach. When working for adviser firms in analysing the discretionary market, we will always recommend supplying a shortlist for selection rather than a defined panel. The reason for this is that we feel it is good practice to engage with the discretionary firms before any decision is made.

Engagement gives the adviser the opportunity to test responses to earlier due diligence, seek clarification on any issues and, importantly, give an indication of what the discretionary firm will be like to do business with on a day to day basis. We all like to be loved, made to feel important, listened to and taken seriously. Face to face engagement and some telephone enquiries give  advisers a good sense of how a future relationship will develop.

The majority of discretionary firms now dealing with the adviser market have been on a fast learning curve. While there has always been a handful of discretionary firms that have always served the adviser community well, it is a relatively new distribution outlet to most.

Some 6 years ago when Defaqto started looking again at the discretionary market, most firms were genuinely surprised that we wanted information on costs, charges and performance. Now, thankfully, almost all the firms understand that advisers have due diligence obligations to their clients and if they cannot give the information that advisers want, then the firm will not even be considered.

I believe that we have witnessed a change in mind-set from both the discretionary firms and the adviser community when it comes to providing investment solutions for the retail client, and this is not unrelated to the regulators renewed interest in robust due diligence.

For the most part, discretionary managers have learnt quickly that advisers require information to help make their selections. Discretionary manager’s reluctance in providing information, particularly in relation to performance, may have been well founded in the past. Historically, discretionary managers have been much more used to running family money for the long term, even inter-generationally. Here, the imperative to produce short term outperformance has not been there.

It is difficult to deny that advisers who may have been more used to fund picking, relied heavily on past performance, probably dismissing any funds that were anything worse than second, or even second quartile over various time periods.

This does mean, however, that shorter term performance (perhaps anything less than 5 years) of DFMs can sometimes look a bit weak against popular funds, and you can understand the DFM’s nervousness on how shorter term performance figures will be viewed on propositions that are playing the long game with eyes on outcomes much further in the future, reducing investment risk (and hence potential reward) to a minimum and still be able to deliver on expected outcomes.

I think what has changed is that advisers themselves are now much more focussed on client outcomes and their attitude to risk. When looking at investment solutions, absolute performance is no longer looked at in isolation. There is now a change in approach where investments are selected in order to meet client outcomes, and crucially taking as little risk as possible in the process.

This now means that performance is looked at more in the context of risk and progress towards achieving client goals. With this change in mind-set, from both parties, and a mutual understanding of each parties needs and concerns, the flow of information between adviser and DFM has improved considerably over recent years. Advisers should now expect from the discretionary managers:

  • Dedicated broker support and a named account manager
  • A wide variety of information available as downloads from the DFM website which would include terms and conditions, performance information, portfolio fact sheets, market views – in fact the kind of information that is already available for funds.
  • Regular (at least annually) reviews of progress and performance
  • Online functionality including portfolio valuations and transaction histories
  • A certain level of adviser support in explaining/marketing solutions to clients or groups of clients
  • Flexibility in the division of responsibilities
  • Flexibility in content of tri-partite agreements
  • Adviser charging facilities


Remember, the regulators are clear that if due diligence is not complete, to the satisfaction of the adviser, the adviser should not go ahead with the recommendation. We are of course assuming that requests for information are both relevant and reasonable.



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