The most frustrating thing for advisers in choosing an investment partner is often the lack of transparency and insufficient disclosure of crucial information.
That leaves some advice firms either reluctant to embark on a new outsourcing relationship – feeling that maybe it is better to stick with ‘the devil they know’ – or not to outsource at all.
Advisers describe feeling that “bespoke wasn’t really what [the DFM] wanted to offer”; “they were trying to push us towards using one of their off-the-shelf portfolio offerings”, and “it felt like more of a fig leaf – they just pay lip service to firms like us.”
We asked independent research firm NextWealth to dig into the nature of investment partnerships as a follow-on from their annual analysis of investment propositions. This research points to the continued rise of outsourcing but with a concentration to more strategic relationships with a smaller number of DFM partners.
We were particularly interested in how advisers are evaluating existing and potential partners and what they really want from an outsourced relationship. Advisers can download the results of that work – follow the link to see our Guide to Working Effectively with Investment Partners.
What does the New Consumer Duty mean to financial advisers?
With Consumer Duty upon us, these relationships and the way advisers are selecting their investment partners, take on a new significance.
Annual reviews of existing managers should never have been a ‘box-ticking exercise’. However, advisers interviewed by NextWealth acknowledge that “committed relationships with DFMs can be very difficult to break”, and “you can evidence anything really”.
In the past that may have meant starting with the end in mind. Having a preferred or embedded partner and steering the due diligence process to come out with that partner as the answer.
This is changing with the introduction of Consumer Duty, which demands more rigour from both initial and ongoing due diligence. As a result, some advisers describe moving from an annual “kicking the tyres” review to a more thorough questioning of “have we got this right?”.
Independent resources such as DD|hub are available to support advisers in this process and put their potential investment partners under the microscope. With Consumer Duty upon us, firms are not only looking at what fits their clients’ key requirements but also what might go wrong. What foreseeable harm should be considered when bringing a new partner into the investment proposition? Potential pitfalls might be anything from cybersecurity to financial resilience to service standards.
The due diligence process can be overwhelming, and I completely agree with Chris Jones at DD|hub when he describes how advisers have “a lot on their minds with fair value assessments and demonstrating outcomes. But Product & Service outcomes are built on the PROD process and if you haven’t done thorough due diligence (including thinking about foreseeable harms) you can’t demonstrate a solid process.”
What are advisers’ 10 "killer questions"?
When I talk to advisers about research and due diligence, the first thing I say is, “let’s look at the questionnaire you’ve sent us. What are the top 10 questions that I should put an asterisk next to, to get my asset management team to focus on?”.
We’ll answer the other 140 questions, too, but what are the top ten things each adviser really wants from an investment partner or really doesn’t want?
It may be that they want a very clearly defined set of growth and income portfolios that work within a very specific targeted volatility range. It might be they've got an OCF cap that they don't want to exceed for their clients.
Focusing on what is really important is going to result in a partnership that aligns well with the advice firm’s values and priorities.
NextWealth’s research* compiled the top research and due diligence criteria that advisers are focused on. Price and performance come in as initial screening factors; whilst some of the more in-depth due diligence is now around topics such as cultural fit, investment philosophy and the opportunity for tailoring models.
What outcomes do advice firms really want from their DFM relationship?
I believe this is where you build strategic relationships between advisers and DFMs that move beyond a handful of portfolios delivering a certain percentage a year into a service that helps deliver the client outcomes you really want. And where the investment proposition you come out with is something you can really call your own because it’s aligned to your needs and expectations.
It involves firms getting really clear on the outcomes they expect to receive, for the business and for their clients.
What exactly is expected on a daily, weekly, monthly basis?
NextWealth heard from an adviser for whom it’s really important that an investment partner is “aligned to our own approach and service standards, and generating monthly fact sheets, and quarterly bulletins or brochures, because that’s the content we need for our end clients.”
For example, if an outcome is that the adviser wants to be communicated with on a quarterly basis by a portfolio manager then they need to ask if that's possible. Do they want to come and meet the manager in our London office and discuss the markets? I encourage advisers to be clear about asking for that. If that feels like overkill and they just want monthly fact sheets with little customisation or co-branding they need to be specific about that too.
We’re all focused on delivering good outcomes for clients, and a good outcome, in my view, is the one you expect. If you’re interested in finding out more, check out my piece on how Consumer Duty will impact investment selection.
Source*: NextWealth: An Adviser Guide to Working Effectively with Investment Partners; May 2023
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Guide to Working Effectively with Investment Partners
Download our latest IFA research, helping your firm navigate Consumer Duty.Find out more