Matching a DFM to your advice model

Avoid bad DFM relationships and confusing your clients by ensuring the service has the right soft skills and fits with the advice you provide

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Discretionary fund manager. The term gets a different reception depending upon who you are talking to.

For every DFM devotee there will also be a naysayer with tales of woe to impart. Very often those tales are the result of a failure to establish that most critical factor when building the relationship - is the DFM a good fit with my advice business?

There are several elements to that degree of fit - some that rigorous due diligence practices will pick up, other that are much softer. The due diligence aspects have been widely discussed so this article is focused on the softer elements.

First, what do your clients expect from their relationship with your firm and the DFM? For some customers, it is all about “performance” - they are happy to have minimal contact with the DFM, just caring about growth and returns a la the stockbroker-type relationships of old. Personalised service is not required and the client expects results without lots of meetings and interaction.

Other clients sit more at the “fluffy slippers” end of the scale, and require a lot more hand-holding and reassurance.  They want to know their investments are growing, but also need a sense of comfort, security and interaction - not seeing the DFM representative at least quarterly would unsettle this type of client.

Most sit somewhere in between - they want some interaction and decent performance in line with the type of advisory business they signed up to. Getting this fit right is half the battle, but the other half is ensuring it fits with the advice model- and this is where problems have historically arisen.

1) Who owns the contact strategy for the client? If the DFM contacts the customer more often than the adviser, will this quickly become an episode of “Whose client is it anyway?”

2) Does the DFM use the same language on risk?  Few clients will be comfortable with differing scales and descriptors – explaining to them that a carefully calculated “5” in adviser-land actually means “3” in DFM-speak or that moderate and cautious are actually the same thing isn’t a great way to start any sort of long term relationship.

3) What type of service adds value for the client base?  Model portfolio services, equity trading and derivative portfolios all sound very impressive but may not align with clients’ expectation, or more importantly with what clients actually need.

4) Does the DFM understand how the adviser operates? This means digging beneath the sales pitch to explore end-to-end processes, especially at the boundaries and before entrusting any clients’ money to the new partner.

Getting these basics aligned before you start deep diving on the due diligence of your DFM beauty parade may seem obvious, but the road is littered with defunct DFM relationships where this understanding was never reached.

Rory Gravatt is a consultant at Altus

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