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DFMs: Predator or partner?

While modern day adviser / DFM arrangements should work as partnerships, there is still much to be discussed as part of the selection process, says Lawrence Cook, director of Marketing & Business Development, Thesis Asset Management

In the past, some relationships between advisers and DFMs were little more than an uneasy compromise based on necessity and characterised by mistrust. Advisers whose clients had money to invest needed the specialist and sometimes niche skills of a discretionary investment manager for research, stockpicking, portfolio construction and rebalancing, while the discretionary nature of the permission enabled the DFM to manage the client’s assets largely without reference to the adviser who had made the introduction in the first place.

Old-school (and sometimes arrogant) DFMs like this often wanted a relationship directly with the adviser’s client, taking on the responsibility for KYC and suitability recommendations themselves, and leaving the adviser feeling more or less superfluous to the relationship. In extreme cases, client reporting and even client meetings with the DFM to discuss portfolio performance were set up without including the adviser.

No wonder some advisers steered well clear of these predatory DFMs and instead took on the responsibility for investment recommendations themselves, despite the obvious drawbacks of the advisory permissions model!

It’s different today 

But partnerships between advisers and DFMs today are very different – or at least they should be.

In today’s world of DFM partnerships, the adviser remains the central ‘trusted professional’ in the eyes of the client, and the DFM is a provider of investment expertise. Whether the adviser or DFM conduct suitability assessments, the result should be the same: the client has a suitably invested and monitored portfolio, and the adviser is the central point of client contact for all things financial.

But DFMs today can also offer advisers much more service and support to add value to their client relationships.

The starting point should be for DFMs to ensure that sufficient information is available to allow advisers to start building a shortlist of potential DFMs to accommodate their clients’ different investment objectives.

For example, third parties such as ARC, FE, Dynamic Planner, Discus and Defaqto all offer DFM and portfolio comparison tools to get adviser due diligence underway, and DFMs should engage with a range of these third parties for the benefit of advisers.

More in depth information can be gained from face-to-face meetings between adviser and DFM, which should include discussions on risk and return parameters, performance track record, platform and wrap availability, rebalancing, charges, diversification, drawdown and so on.

The process of selecting DFMs may also cover areas such as the detail and frequency of client reporting, the availability of back-office data feeds and the market and investment commentaries provided to advisers for use with clients.

At some stage, discussions should also cover the process and cost of switching to another investment manager, should the DFM not perform in line with adviser/client expectations.

Referral can be two way

DFMs can also support advisers above the individual client level; for example, by introducing professional connections, service and product innovation, hosting educational seminars and conferences, and referring their own clients to advisers where they identify a need for financial planning.

Clients need to engage with both financial advice and investment management if they are to secure the best outcomes. To achieve this advisers and DFMs need to work in partnership with each other, bringing their particular skills to the relationship for the ultimate benefit of the client.

A return to the bad old days of DFM ‘predation’ and adviser ‘protectionism’ is never going to work in the client’s interest.

How to spot a…DFM Partner or Predator?

Visit the Thesis Asset Management website

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