As more adviser firms consider their resale value, the impact of any DFM outsource looms large. For some, a DFM presents a potential obstacle to installing an acquirer’s central investment proposition. To others, it looks like a robust control framework which enables additional income streams. Whichever interpretation you take, it is worth asking exactly what outsourcing investment management actually entails.
Plainly it is not appropriate for the customer to be completely disengaged from how their investments are managed. Neither is it appropriate for the advice business to abdicate responsibility for ensuring a customer’s investments are managed in line with their plan.
Above all, advice firm and DFM approach must be aligned. With more and more businesses using risk tools, it is important to ensure these are coordinated between adviser and DFM. However, do not stop there – it is important to go further and understand how the adviser and DFM interpretation and practice of risk align. Tools are only a single part of the risk conversation. The soft skills, positioning and portfolio approach which back them up are key to ensure that customers are given a consistent message and output.
The advice business needs to validate that the service a DFM delivers is in line with expectations. This type of monitoring was historically an arduous business. Wind the clock back to the turn of the century, and the data from DFMs was of Victorian vintage. A hard copy portfolio update and contract notes was about the best you could expect. Worse still, whenever an issue arose, it was generally too late to do much about it.
Fast forward to today and technology has delivered integration with adviser back offices, portfolios built on platforms available 24/7, and in some cases the DFM will even open up access to their online audit trail. This is how a firm can maintain confidence in the rigour attached to management and servicing and means in the unlikely event of a DFM going rogue, the business has a much better chance of mitigating the risk. Some adviser systems are even approaching automation of this check using agreed parameters for the individual customer to send a warning message to agreed parties.
Suffice to say not all DFMs are on this road to enlightenment. But for any firm considering its appeal as an acquisition target, selecting the right DFM business with the right technology to validate quality of the service and provide the right oversight should add appeal rather than detract from it.
And if the comparison data is that good it might even provoke a change in buyer’s model to align with its new purchase! The moral of the story – do it right and get the right systems and controls in place, the buyers will find you and recognise value when they see it.