In the past few years, the RDR has meant financial advisers have had to respond to regulatory requirements and the issue of client suitability.
For some, this has meant time has become a precious commodity. While some advisers have retained their investment expertise in-house; others have refocused their businesses towards the maintenance of client relationships and paraplanning, and chosen to outsource their investment propositions.
Ultimately, this means that their clients enjoy the advantages of having their portfolios managed by fund managers who are monitoring markets daily.
Pure DFM
This outsourcing takes the form of a number of different propositions. In a purest sense, discretionary fund management (DFM) tailors the portfolio to meet an individual’s specific investment objectives and can incorporate constraints such as ethical or tax considerations.
It is a service, with the client meeting the person who is making the investment decisions. For some clients this may not be important, but for others it may be imperative to managing their attitude towards risk. Think of the passenger scared of flying meeting the captain.
In other instances, advisers might opt for a multi-asset fund, which cannot be tailored in the same way, but can still meet a targeted outcome and provide a portfolio solution. But does this mean we can just start calling multi-asset funds ‘DFM lite’? Absolutely not.
So why have the waters been so muddied?
Enter the MPS (the model portfolio service). The MPS lies precariously between these two bookends. In essence, this is a pooled solution with all the drawbacks of a conventional fund and none of the advantages of a full discretionary service. Arguably, your average MPS is less active than a multi-asset fund and is also more restricted in its toolset. For example, multi-asset funds can adopt currency-hedging and use derivatives to hedge out market risk.
How can advisers distinguish between multi-asset funds and DFM solutions?
As mentioned earlier, multi-asset per se is not ‘DFM lite’ and one concern is that some investors may continue to see it that way.
Multi-asset solutions are often used for clients with smaller amounts to invest, although this is not necessarily a client-segmentation issue. The decision whether to use a multi-asset fund or a DFM should be based purely on suitability and not the amount available for investment. Clearly, for less wealthy clients DFM may not be an option, so MPSs or multi-asset funds may be the only choices in those instances.
If a client is reasonably sophisticated and has no requirement other than generating returns over the long term, then a multi-asset fund may well be appropriate.
Suitability
DFM is more suitable for an investor wanting flexibility and influence. DFM services are also suitable if a more structured, predictable cashflow stream is needed, for example. Capital gains tax allowances can also be used effectively to supplement income, particularly for higher-rate income taxpayers. Furthermore, there may be other DFM services that the client may wish to take advantage of, such as specialist inheritance tax portfolios, banking and trusts.
