Due Diligence Services & Discretionary Management Propositions for UK Financial Advisers
Selecting a Discretionary Management Partner : Due Diligence Considerations
The ongoing development of IFA Targeted Service propositions means that financial advisers need to consider which Discretionary Service Types they offer their clients, and understand how the services differ in terms of the value to the client.
The core service types on offer are each increasing in terms of provider numbers, and it is probably wise to ensure that due diligence segments propositions so that like for like comparisons are always made. The following segmentations are covered in the most recent Official Defaqto Review of Discretionary Management published in April 2012
Click Here to download the full research report from Defaqto.
Although historically discretionary management has been based on personal service, many companies
operating in this space have constructed a range of 'off-the-shelf' portfolios that have different risk reward
profiles. These portfolios can be selected individually for a particular client or blended where necessary and
are normally populated by collective investments.
These portfolios have been constructed in order that the minimum entrance requirements can target a more
mainstream audience. This pooled approach ensures that more clients can be served but is likely to remove
some of the bespoke services often associated with discretionary managers.
These come in the form of fully bespoke portfolios that are tailored completely to the individual client needs
and are likely to employ a range of asset types from alternatives through to individual equities.
The minimum entrance requirements for this level of bespoke service naturally comes at a higher level of
investment, typically around £250,000, although even this figure has reduced over the past few years.
As a rule of thumb the level of personal service and the range of asset types employed are likely to reduce
with the level of minimum investment.
These are funds that mirror the philosophy, methodology and decision making of the segregated portfolios.
Because they are structured differently and come under different rules they may not replicate the
segregated solutions exactly, but they do allow advisers to offer the same process to clients with smaller
As these are collectives - often run on a multi-manager basis - there is not usually any additional service
beyond that offered by other collectives. A few discretionary firms, however, run model portfolios only on
a unitised basis, and some with service levels usually only associated with segregated portfolios (minimum
investment for these solutions are likely to be understandably high).
Service Standards for Clients of Financial Intermediaries
In general terms the service to clients increases in proportion to the amount invested. This is particularly
true of the bespoke portfolios, where minimum investments are likely to be of the order of £250,000 and
upwards. The first part of the relationship with a bespoke discretionary manager is establishing directly with
the client what kind of service they want.
On the investment side, the portfolios will be tailored specifically to the individual clients and cover such
things as risk tolerances, capital gains tax situation, investment likes and dislikes, dealing with treasured
assets that the client may want included, but not managed.
In terms of relationship, things like regularity of reporting, frequency of investment manager meetings and
adviser involvement can all be negotiated and established at outset.
It is in this area of discretionary management in particular that establishing performance history is difficult
as, by definition, every client's portfolio can be different and is likely to be run in different ways by the
investment managers, although some centralised controls should exist. Evidence of manager skill should
none-the-less be sought.
It is often difficult to establish charges as well, as this is often open to negotiation, and dependent on the
level of service demanded. However, it should still be possible for the discretionary managers to provide a
good estimate if the adviser can give an indication of the kind of client that is likely to be suitable;
Most of the service delivered to model portfolio clients is standardised. In other words, all clients receive
the same service. In simple terms, the bespoke portfolio service is tailored to the client, whereas for
model portfolios, the service is set and clients are matched to the portfolios. However, some of the same
questions will apply to both solutions. For instance:
• What is the frequency of reporting?
• What is the content and depth of that reporting? For instance, does it include capital gains tax
calculations, income tax payments, dividend payment and transaction histories?
• Is there access to online valuations?
• Is there opportunity for advisers to personalise and/or contribute to reporting?
Generally speaking, in terms of service unitised discretionary portfolios should be thought of as any other
fund with standard statutory fund reports and accounts. However, there are a few unitised fund providers
that will add in some of the service elements of the segregated portfolio solutions such as more detailed
and frequent reporting, access to fund managers and/or investment account managers. The minimum
investment amounts for this kind of service from a unitised fund is likely to be much higher even than
those for segregated model portfolios.
Suggested Due Diligence Checklist for Financial Advisers researching Discretionary Propositions:
Identify desired process/relationship - adviser need;
Define key 'selection criteria' and importance levels for each - service comparisons;
Understand reporting process and administrative processes - client communication;
Define charging structures;
Compare access methods. Consider all routes into the discretionary service;
Produce shortlisted service providers for full due diligence and negotiation process.
Key facts and service variables
The comparable features of discretionary management services are as follows:
- Company/parent, size, credit ratings and financial strength measures;
- Style and approach of investment service;
- Performance histories (risk vs return);
- Key personnel, experience (investment/client type) and qualifications;
- Research levels available to firm;
- Investment process and regulatory framework;
- Assets employed;
- Investment vehicles used;
- Administration and custodian arrangements;
- Investment targets and benchmarks;
- Minimum investment amounts;
- Third party relationships and product offers;
- Reporting and service arrangements;
- Policy on cash assets and retrocessions;
- Approach on the RDR and compliance responsibilities.
For full details on Discretionary Management Services, and to review further Due Diligence Guidance, visit www.defaqto.com/adviser/ifa-guides