Five ways DFMs can help advisers deliver fair value for their clients

Tom Hawkins explains how advisers can ensure their clients are getting good value in accordance with Consumer Duty & due diligence requirements.

| 10 min read

Five ways DFMs can help advisers deliver fair value for their clients

A good friend was telling me recently about an Ofsted inspection of the primary school at which they sit on the governing board. One of the questions that came up during the inspection was: how are the school governors ensuring children are getting a good deal? It occurred to me after our conversation that there is a lot of similar ground in how our industry is tackling the question of making sure clients get good value.

It’s quite an oblique question. Kids aren’t turning up to a school’s marketplace clutching a wad of cash and comparing solutions for their educational and social development. And a good deal for one might be very different to someone else with different needs and priorities.

Ensuring good value for clients is not that straightforward to answer either, as we know from all the industry discussions and wrangling on how best to demonstrate value.

Advisers, just like teachers and school leaders, make decisions all day on how to use their skills and experience and resources to benefit the best interests of the people they serve. Consumer Duty, just like an Ofsted inspection, raises the bar not just on how that gets evidenced, but also the lens through which it is examined.

At the school, the lens isn’t on the balance sheet, or the performance data, or the parents or anyone else in between. It’s squarely focused on good outcomes for children.

Just like in our industry, the first question is: what are good outcomes? For an advised client, what is value for money? And where a third party comes in to help deliver the proposition, how should their role in the value equation be weighed up?

That’s a topic we explored recently in our latest research project conducted with independent firm NextWealth. Advisers can follow the link to see how other firms are considering the value that a discretionary fund manager (DFM) brings for their business and clients.

How can DFMs help advisers deliver fair value for clients?

Our research shows that it isn’t always easy for advisers to articulate to clients the benefits of working with an external investment partner, or to distinguish between benefits for the business and those for clients. Price is only one part of the value equation and needs to be set against the depth of proposition, service and all the other component parts that sit on the other side of the equation; each of which can be influenced by working with a DFM.

Here are five ways we think DFMs can help advisers in delivering a good deal for clients.

1. Understand what’s important to an advice firm and its clients

    Value can mean very different things to different types of clients so in defining mandates for a particular target market it’s really important to get specific about what those clients want to do with their money. Without over-generalising, I’ve seen some fascinating studies showing that when advisers connect more closely with female members of a family, they tend to have a clearer handle on the reasons why they are saving and investing. Rather than portfolio growth, the value might be more about protecting the family in the future – and that will influence how the portfolio is constructed.

    When demonstrating value, the number one thing that gets documented by advisers is still performance of investments. In an effective DFM partnership, both parties will understand whether that represents a good outcome for clients in itself. Or whether clients are placing more value on a safe pair of hands and protection against a downturn. Or on an expert second opinion about where their money is best invested.

    2. Articulate the client benefits of a DFM-supported proposition, not just the features

      Advisers interviewed for the guide could readily point to key business benefits in working with an external investment partner. Having client portfolios managed more efficiently and rebalanced in a more effective way was a common benefit, as well as freeing up valuable time for advisers to focus on clients’ planning needs. One adviser commented: “No business is going to continue to succeed if clients are loss making. We need to spend less of the allocated budget on rebalancing, getting the same outcomes, so we can provide additional services in other areas and partnering allows us to do that.”

      In the past, we in the industry have focused on telling firms what features the DFM will deliver. For example, a quarterly rebalance of clients’ portfolios with a strategic tilt to the asset allocation. Those are features, the benefits of which won’t necessarily mean anything to clients.

      We now need to turn the lens around and consider what clients are seeing as they look into an IFA business. DFMs can support firms in articulating the benefits of the partnership to their clients in a language that resonates. Instead of the above example, if we help advisers articulate how a client’s portfolio will be continually aligned to the level of risk they are willing to accept so they have investment experiences that match their expectations, that’s a real benefit for clients. Similarly, we can present how we take into account clients’ long- and mid-term objectives, adapt to changes in their income requirements, and help optimise any existing investments.

      Advisers named client-readiness as a determining factor in their selection process for new DFM partners, commenting, “they need to have a clear and easily articulated proposition to a client.” The better the DFM is at articulating a clear and consistent philosophy, the easier for advisers to help clients understand what they are paying for and whether it represents good value.

      3. Support advice firms with client-facing communications

        In our partnerships with advice firms, DFMs fundamentally need to deliver to the mandate and deliver a good level of performance. However, there is so much more we can do to help an advice firm bring the proposition closer to their clients.

        For example, something that smaller IFA firms in particular struggle to do on a regular basis is find time to communicate proactively with clients via tailored updates or commentary on market events. In our partnerships we can help by creating value-add services like regular portfolio manager commentary that firms can customise with their own branding and send out to their clients to help deepen those relationships and keep clients well-informed, particularly in volatile times.

        We’re seeing advice firms embrace the opportunities presented by multimedia communications too by recording short, personalised video messages on their phones to email on to clients with a link to their portfolio manager’s update. That represents a fantastic service in personalised communications and I think DFMs can do more to support advice firms in that field.

        4. Share lessons of what’s worked in implementing Consumer Duty

          We’ve been hugely impressed with some of the projects we’ve seen advice firms implement to help demonstrate value for clients, from mapping client feedback to specific KPIs, testing communications, and deepening the review process.

          Some of this work though can be overwhelming for smaller firms that are already overstretched and don’t have the resource to bring in market research agencies and other specialists to help.

          We know from our own roadmap that certain projects have been paused while we focus on the implementation of Consumer Duty. It’s our view that when larger firms have cracked some of the trickier elements of demonstrating value or meeting other requirements of the regulation, we should be sharing that with smaller firms in the value chain and highlighting the lessons learned and what has worked and what we might now do differently.

          5. Prompt advisers to look at the detail behind Fair Value Assessments

          Advisers have always assessed the suitability of any DFM they work with for their clients on the basis of ‘is this a strong proposition for this client at a good price?’.

          Consumer Duty demands a more rigorous assessment and DFMs can prompt advisers to look further into Fair Value Assessments to use that detail to inform their own thinking about how the proposition maps to their target market segments. A huge amount of work has gone into the creation of Fair Value Assessments, and there’s a lot of information that sits behind the published summaries.

          In our guide for advisers we outline some key points to consider in the due diligence process and Fair Value Assessments should definitely factor into that process.

          When we’re looking at ensuring a good deal for clients, there’s a lot more to feed into the equation than the product that is being delivered and the price clients are paying.

          DFMs can do a lot to help advisers articulate and deliver all the other associated services and conversations and reports and communications, and to ensure that value is projected in such a way that it is meaningful for clients.

          Most of us with school-age children want teachers to be focused on doing what they do best in the classroom. In the same way, anything DFMs can do to help lighten the regulatory burden for advisers will free them up to spend more time in front of their clients and that’s the best way to deliver real value.

            Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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            Download our latest IFA research, helping your firm navigate Consumer Duty.

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