Discretionary management - service and services
31 July 2014
One of the fundamental reasons for using discretionary management is to delegate investment decisions to a third party. Quite reasonably, there is going to be a cost to the client for this service. So, what else do you get for your money?
Types of adviser services
Historically, discretionary management has been associated with a very personal service: oak-panelled boardrooms, good lunches and a fine bottle of claret, all overseen by your own personal investment manager. Variations of this personal service do still exist, but are less prevalent in the retail space.
When considering discretionary management and the level of service and services provided through the adviser distribution channel there are, in broad terms, three types of solution to consider, each of which tends to offer a different level of service:
- Bespoke discretionary management, where a segregated portfolio is constructed for the individual client; in itself, this is a very personal service requiring discussion and usually client meetings with the discretionary manager
- A managed portfolio service, where segregated portfolios are pre-constructed and it is up to the client or adviser to choose the most suitable option - it means that client contact with the discretionary manager is unnecessary; the personal service is provided by the adviser
- A unitised DFM is essentially a managed portfolio service that is constructed as an authorised collective; in terms of service, this is not likely to be any different from any other fund
For the purposes of this article, we are considering discretionary firm solutions, but it should also be noted that all authorised funds are run on a discretionary basis with fund managers making the investment decisions on which stocks or assets to invest in and in which proportions.
What additional services to expect
It goes without saying that investment managers that deliver to their mandate and help clients achieve their goals are worthy of a fee. But what should a client expect for their money?
Bespoke discretionary management is, in many cases, just that. It is not only the investment approach that is bespoke to the client, but the service elements often are as well.
It will come as no surprise that the greater the amount of assets the client has under management with the DFM, the greater the flexibility in the range of services on offer.
Managed portfolio services are designed to offer a standardised service, sometimes rather unfairly described as a ‘one-size-fits-all’ service. There is unlikely to be much opportunity for the tailoring of services to the individual client. However, money does talk and if an adviser has committed significant amounts of client assets to a particular service they may be able to negotiate additional facilities or features.
For all categories of discretionary management there are some fundamental elements to the services that should be provided:
- Current valuation - at least once a year
- Transaction details - at least once a year
- CGT report - at least once a year
- Consolidated income statement - at least once a year
- Market commentary - at least once a year, explaining the transactions and positioning the portfolio in context of market conditions
- Online valuations - most DFMs should now be able to provide this
- Online transaction histories - most DFMs should now be able to provide this
- For bespoke clients regularity of formal reporting should be up for discussion
- Most manages portfolio services are collectives-based, a few may have direct lines of stock in them and fewer still will be predominantly direct stock; the manager will invest as he sees fit
- Bespoke portfolios will contain whatever assets the adviser/client feels is right (although they too will have a preferred way of investing and may, for instance, steer clients towards collectives or indeed direct stock); requests for particular asset types to be included in portfolios may well be governed by the size of portfolios
- With bespoke clients, requests to omit particular investments will be acted on (eg, no property as already own a factory); this is a part of the getting to know the client process
- Some discretionary managers, predominantly bespoke, will allow the inclusion of treasured assets into portfolios; these are assets that will feature in portfolios under administration for aggregation and administration purposes but will not be managed; they will usually still carry the management fee
- For bespoke, construction of portfolios is done for individual clients; it is therefore necessary to have access to the discretionary manager or an investment account manager so that efficient communications are in place in case of changes in client circumstances or changes at the discretionary firm's end
- Whether access is direct to the portfolio manager or through an account manager is likely to be a function of the size of the portfolios
- Client meetings are costly, so the frequency of client meetings that can be facilitated is also likely to be influenced by the size of the portfolios
- Some discretionary managers will have offices in various locations around the country, which is likely to appeal to national IFA firms, whose clients may also be geographically diverse
- Equally, some advisers may prefer to deal with more local firms
- For managed portfolio services, neither client nor adviser can influence the DFM’s portfolio construction so there is actually no need to have client meetings - however, a few firms will facilitate this depending on circumstances; in this instance, it is probably more important that the adviser receives the support of the discretionary firm
In summary, the service surrounding bespoke client service is to a certain extent up for negotiation and discussion, as is the construction of the portfolios for the client. Broadly speaking, although not exclusively, the size of the client’s portfolio and therefore fees earned from it will determine the level of flexibility in terms of the overall service provided.
Managed portfolio services are a much more commoditised offering, especially in terms of portfolio construction. Generally speaking the service and services for the client associated with these offerings are fixed (although it is always worth asking!). It is more likely that any non-standard facilities will apply more to the adviser than the client, perhaps with the exception of the very wealthy who are in any case more likely to go the bespoke route.