City Wire UK, the publishers of the leading professional financial services magazine “New Model Adviser” recently invited Caroline Anstee, Managing Director of Anstee & Co., to express her views on Discretionary Fund Managers (DFM).
The article appeared in the magazine on the 3rd January 2019 as follows-
What is the winning formula that makes discretionary fund managers ideal partners for advisers?
This question does not have a simple answer, especially as IFAs already have so much on their plate; from dealing with increasing regulations to adapting to clients with much more complex needs.
However, as the need for outsourcing investments to specialists continues to rise, advisers reveal what’s on their to-do list when they hunt for the perfect partner.
A shared principle is that the investment style of a fund group needs to fit that of a client while making sure that the service brings value for money and that it is consistently reviewed over time.
James Roberts, managing partner at Partners Wealth Management, says the due diligence process on prospective outsourcing partners has to start with the client in mind to be able to differentiate the type of investment managers that would fit their profile.
He says: “It’s no good having one or two discretionary fund managers that are of a same type. You have to understand whether you’re looking for someone who wants direct equity as a client, someone who wants to be very risk averse or very risk on because [fund] houses have styles.”
Advisers also look at those firms that can benefit the end client with their company scale and also demonstrate a strong history as a firm.
This is why IFAs put a lot of focus on finding a firm that will match their own culture and dig deep down in the values and goals of the potential partner.
For Caroline Anstee, managing director of Anstee & Co, which she set up in 2012, careful due diligence alone is not enough when deciding who will manage a client’s portfolio.
Like many other IFAs, especially smaller firms, Anstee, who has always outsourced investments, employs consultants to help research potential partners. However, she always puts a distinctive weight on the human component of the research.
“For me, it all comes down to personalities, it’s the people within the firm, it’s the culture of the firm,” she says. “It’s down to individuals and the service that I get from those individuals and how they react with my clients because it’s a very trusting relationship.”
Roberts adds: “As an IFA, you have to understand the cultures of those firms. That’s why you need a guide like Asset Risk Consultants, that gives you that first level that you then go in underneath and only then can you truly map the client to the relationship that they’re going to want. That’s when you’re adding value.”
The issue of cost and value for money in financial services has gained much more attention in recent years, particularly compared to past decades.
Andy Bracken, a financial adviser at Timothy James & Partners believes that IFAs have been through a significant change when it comes to their due diligence on investment managers, because of different degrees of transparency in presenting costs and charges.
He says: “You are definitely questioned about cost a hell of a lot more than you used to be. Probably going back five years ago, I don’t think any client ever mentioned the cost of funds and neither did we so much as we do now. It was all about performance essentially.”
He adds: “The issue of cost now for us was driven by our research around MPS. When we looked at external models, they were expensive. There’s no getting away from it, MPS is expensive and we all have to deliver a net return to clients.”
James Herman, who usually prefers model portfolios instead of bespoke DFMs when outsourcing, says it is important to distinguish costs from the value when looking for an outsourcer. “It’s really a balance in terms of making sure that it’s a competitive offering, but you’re actually exploring what that cost is providing the client.”
Schroders head of UK intermediary, Philip Middleton, also asks whether advisers should still challenge providers on performance as opposed to cost.
As an investment specialist, he says the group is continuously challenged not only on costs but also on how much they deliver to clients.
Overall, IFAs say they need to make sure clients understand the way a DFM invests in the first place in order to manage clients’ expectations.
In times where market returns are lower than they used to be, the challenge comes down to educating clients on long-term investing and inform them on how a chosen DFM would intend to approach a new course of the market.
Bracken says: “MPS has had struggles, low-risk assets and multi-asset funds have all struggled. You look at people who are regarded as top managers but they have lost you money over two years, so it’s very challenging.
“So, if you don’t educate the clients, you’re in trouble because they’re going to say, ‘Why are you losing me money’?”
But not all IFAs agree that relying on performance data is the way forward in their search for a partner.
For clients investing for the first time, Anstee prefers to look at the overall life planning with the client on a yearly basis rather than point down to short term returns.
She says: “The stock market might be going all over the place, but we’re still on track for the plan and you still can do the things that you want to do. So, it’s much more about a return on life, rather than return on investment and that’s what the planner is.
“So, if I’ve chosen the DFM correctly, I’m challenging them and I’m making sure the money’s doing what it should be doing.”
This article first appeared in the New Model Adviser 03/01/2019.
Anstee & Co are a firm of Independent Financial Planners. This means that they look at all the financial options that are open to you from the “whole of the financial market”. The financial advice is unbiased
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