A number of these counterparties also have fiduciary duties to provide checks and balances, so there needs to be compliance and risk teams, as well as appropriate governance structures to support this internally.
“None of this is legally required for an MPS, but we would argue the robustness from this more institutional structure and resourcing provides much greater assurance that there will not be issues further down the line, offering some comfort that clients will experience outcomes in line with expectation,” Lawrence says.
“The advisers’ reputation will become interlinked with that of the DFM when partnering with them, so mitigating this risk is important from that angle too.”
Lawrence also says asking questions about the investment process underlying the service and support offered by the DFM, particularly in tough economic times, is also a key metric advisers should look at.
ESG
As environmental, societal and governance investing becomes more prevalent, this is an area with increasing consumer awareness and demand, and with imminent regulation regarding ESG suitability on the horizon.
Advisers selecting a DFM should ensure the DFM’s capabilities and experiences are aligned with this direction of travel.
Hamm says ESG is an area that is still developing, but many DFMs will inevitably struggle here because their models principally use funds and so the reliance is on the DFMs knowledge of the fund manager and their ESG screening versus [factors such as] standard metrics like fees, performance, volatility.
“Advisers should be pressing DFMs on how they tackle and consider greenwashing and what exists in their investment process to challenge the funds,” he adds.
“The alternative approach is to find a DFM who allocates to direct equities as then the DFM would have assessed the individual company and its ESG credentials, so will be far better placed to engage with the adviser and give them the necessary level of comfort.”
According to Craig Wright, managing director at Evelyn Partners, IFAs should meet the fund manager at least quarterly or attend updates and document the outcomes learned on a regular basis.
Regular updates should cover risk, returns, rebalances and reasons why investment decisions have been made.
Mike Morrow, chief commercial officer at Parmenion, says for an adviser to hold their own permissions, they need to meet a number of regulatory requirements, including:
- Proving their firm has the appropriate investment skills and capabilities.
- Proving their firm has the right infrastructure and processes.
- Proving their firm has the right oversight and governance.
- Provision of regulatory capital.
- Understanding the impact on costs such as professional indemnity.
Overall, the adviser firm will need to be confident that securing their own permissions is worth the cost and risk, which is why it is often only something that firms at scale consider.
