Client buy-in can give discretionary the edge

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When I first started in the industry in the mid-eighties, there was a theme for large wealth management firms to market their own funds.

Generally known as broker funds, these tended to offer an insipid combination of high charges and poor performance. As you would typically expect from this lethal combination, these products slowly diminished and as firms sought more client friendly alternatives, the evolution of model portfolios began. The rest is history.

Today, financial advisers are blessed with sophisticated modelling tools, experienced investment committees all backed with extensive proactive research, making more and more wealth management firms become extremely efficient at managing client assets. One could say that advisory firms utilising model portfolios are almost identical to discretionary investment managers.

Having said that, there remains one significant distinction between an advisory firm with model portfolios and a discretionary investment manager, namely the ability to rebalance client holdings. Having to write to each client to seek their approval to rebalance or switch holdings brings not only administrative constraints but also a variety of other problems, such as being able to measure actual performance given that advised clients will not all respond to the switch recommendation at the same time. In fact, the failure of clients to respond immediately to switch recommendations can result in firms having multiple portfolios since clients will be buying holdings on different days and at different prices.

To provide greater simplicity and accuracy, it might be appropriate for firms to create their own discretionary fund management businesses.  

For many wealth management firms, there is an initial fear of the unknown, and whether they will be able to cope with the complexities of varying their permissions to enable them to operate as discretionary managers.   The thought of holding and/or controlling  client money and increasing their exposure to FCA regulation can deter many wealth management firms but there is, in fact, very little increase in regulatory complexity and a firm with good systems, a properly run investment committee and suitably qualified staff should have few concerns. 

The start point must be whether introducing such a service will enhance the firm’s service and benefit its clients. In theory, most advisory firms that operate in-house model portfolios with their own investment committee are already working in a similar way to full discretionary managers. As above, there are other needs to consider such as operations and compliance, but the extra cost and resource can be easily outweighed by the removal of the administrative cost and resource of writing to a client at every portfolio review date. There is also the argument that by implementing portfolio changes in line with the investment manager’s wishes, at the time the changes should ideally be implemented, will ensure that all clients are treated equally and fairly. It will not be that the first past the post wins (i.e. those who return their advisory confirmation of the changes first).

It would be fair to assume that most wealth management firms tend to operate their practice under the umbrella of a retail platform, so controlling client assets is more centralised. So any firm considering transforming their business along this path will merely seek permissions to control/switch client holdings at their investment committee’s discretion and not handle client money.

It would also be fair to assume that the majority of holdings in a managed portfolio will be predominantly collectives, ETFs and structured products so nothing very racy – compared to equities and debt instruments - which will make processes easier and reduce the turnover of a typical portfolio.

So, what are the benefits for a firm which decides to offer a discretionary investment service?

It will reduce administration and improve treating customers fairly. It will also offer a significant uplift to any future exit from the industry, as most calculations to a purchase price of a firm are based on a given multiple of revenue, but there is also an added value where funds are actually held under management rather than merely “under advisement”.   

Another is the firm will not need to trade in so many different tranches. But, as above, it is the benefits to the client that must carry the most weight.

Will the greater speed with which investment committee decisions can be put into practice have the potential to improve performance? Well, it will certainly treat clients more fairly

Will the reduced administration costs result in lower client costs?  Are the firm’s clients comfortable with ceding this degree of control over their portfolios? A great deal of thought needs to be devoted to these areas.

When you weigh up all the pros and cons of converting a solid robust wealth management firm to offer a discretionary investment management service, then the daunting task of becoming a firm with discretionary powers is not so daunting after all.

Mark Catmull is a partner at Minerva DFM Support Services

About Minerva DFM Support Services :

Minerva DFM Support Services provides wealth management firms with a Discretionary Investment Management Support service, that offers pragmatic, practical assistance and support. We specialise in assisting firms with the move to a discretionary investment service, across the full spectrum of the operation, together with the ongoing support thereafter.

To find out more about Minerva  DFM Support Services visit

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