Investment outsourcing was meant to make life easier for financial planners in the new RDR environment: find an expert who would look after your client and professionally manage their assets through the ups and down of investment cycles.
With discretionary fund management meant to be a cornerstone of this outsourcing revolution, a full year on from implementing the RDR, has the DFM market come of age? Have things panned out as hoped and what does it look like now?
The traditional approach was for an adviser to introduce his or her client to a discretionary manager and a ‘bespoke’ solution was put together and presented. The discretionary manager would, in turn, speak with the client to determine how much of a risk budget to ‘spend’ in constructing a portfolio – managing volatility while targeting a return over and above cash, inflation or whatever client needs dictated. If the client’s investment amount was on the low side, then more of a ‘house’ or model portfolio solution was offered.
Before getting into the shape of the current investment solutions offered, it’s worthwhile reminding ourselves that, since RDR, most adviser firms now operate on a segmented basis for their client base. Segmenting, or grouping, similar clients means potentially providing each with a different investment solution, resulting in the adviser or firm now having to research and then select the right solution, rather than the discretionary manager.
The financial adviser also has to understand the client’s overall risk profile: attitude to rsk/volatility and capacity for capital or investment loss, over potentially various product, wrapper and platform solutions.
In terms of activity in this area, we know from our most recent adviser survey that 45 per cent are now outsourcing their investment management in some way (though this can often merely involve the use of multi-manager or multi-asset funds). This figure has remained fairly consistent over the last couple of years - we found that 42% were outsourcing at the end of 2011 - and it demonstrates the importance of outsourcing to advisory firms’ client advice proposition.
We believe that there are five core challenges for advisory businesses when looking to outsource investment management:
• Understanding the investment outsourcing landscape as a whole
• Understanding the detail of the many options available, to be able to assess how they might support their client advice proposition
• Conducting a robust due diligence process to ensure they select an appropriate solution and partner
• Successfully integrating that partner or partners into their processes and proposition
• Operating a compliant and robust client investment proposition
Here we will touch on the first two of these challenges.
So, does the market look any different since RDR? There has been some innovation driven by the need to provide solutions that suit the way that advisers structure their client business. We have characterised the discretionary fund management universe using this model.
