The bespoke trigger: Discovering when clients need the discretionary touch

Major advice firms cite a host of reasons why clients may need their investments managed outside a standard model approach – none of which are linked to asset volumes

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Advice firms are looking at increasingly complex ways of deciding whether a client really is a candidate for discretionary fund management.

While previously many advisers may have adopted a notional threshold for using a DFM portfolio of, say, £250,000, a large number are evolving the way they make this decision.

Although a client with significant assets may trigger a referral to a discretionary service, major advice firms have cited a host of other reasons why clients might need their investments managed outside a standard model approach. These range from specific ethical considerations to the desire to hold particular ‘cherish stocks’ directly, complex capital gains planning and income needs, or diversification of different pots.

Other clients joining a new firm may have been accustomed already to working with an investment executive alongside their planner, so would be keener to request this.

Product governance

Basing the decision to go discretionary on required client outcomes rather than just asset volumes has led some to examine the choice of who to put on their DFM panel through the lens of the FCA’s product governance regulations, Prod.

Schroders UK intermediary solutions director Gillian Hepburn says:  “When I look at some of the advisers I work with putting together panels, it’s pretty rare they don’t have a broad enough panel if they have gone through the process of really understanding their client groups.”

Hepburn notes that, while some segmentation exercises include an element of asset size – like private banking-style clients at the top end with lending requirements – others are more about a cultural fit, such as entrepreneurs who want their DFM to be aligned to their values and not necessarily to be a ‘traditional’ company.

“Advisers with a broad panel don’t necessarily make the final decision on the DFM,” Hepburn says. “They may take the client to two or three meetings as a kind of beauty parade.

“In cases like that the relationship is really important. ‘Do I trust the guy who’s going to manage my money? But I also need to have good-quality conversations about what I want.’”

Hepburn reports other advisers sending out documents similar to a request for proposal in other lines of business, where the planner notifies multiple DFMs that they have a client of a particular type and asks for information on which DFM can offer a service that fits them best.

Vertically challenged

But the decision whether a client requires discretionary management as opposed to, for example, cheaper multi-asset funds comes into sharper focus in light of the FCA’s recent value-for-money lens.

Clients should not be paying more for something they don’t need, and discretionary management is no different from any other service in this regard.

That is an important consideration when the DFM sits within the same group as the financial planner; if the assets go to the group’s DFM rather than to external managers, the group may make additional margin from that client.

Having invested in its own in-house managers, a parent company is hardly likely to encourage advisers to use DFMs other than its own – commercially the DFM can become a sunk cost if it doesn’t get sufficient uptake.

So, what’s stopping vertically integrated firms referring to their DFM to get extra margin when that referral may not be suitable for the client?

Divided, but conquering

Take the case of St James’s Place, which acquired DFM Rowan Dartington in 2015. SJP has pumped a significant amount of money into the business since then: £12m in 2017 and £9m in 2018.

While accounts show that Rowan still has only £2bn in assets under management compared to SJP’s £100bn, turnover jumped 10 per cent in 2016 and then 31 per cent in 2017. Rowan has doubled assets from £1bn in 2015 to over £2bn today, overwhelmingly on the back of flows from SJP advisers compared to the non-advised private clients it also takes on.

In addition, Rowan owns a 100 per cent holding in independent financial adviser Stafford House Investments Limited, although only £84m of its funds under advice were managed by Rowan in 2018, meaning most third-party intermediary flows are coming courtesy of SJP’s monster adviser force of 4,000-plus planners.

But there is an extra cost to an SJP adviser being passed out to discretionary management. The charges for advice are identical, but Rowan’s intermediary website shows it levies an administration charge of around 0.3 per cent, and an annual management charge of around 0.3 per cent as well. Its income portfolio, for example, has a factsheet listed with underlying fund costs of 0.75 per cent, giving a total expense ratio for the service of 1.4 per cent.

Speaking to those within SJP, they say there is no central driver to get people to use Rowan – SJP as an entity is pretty agnostic – and from the advisers’ perspective the fees they receive are the same. Some advisers and clients want a tight ongoing relationship with their investment executive; others far less so.

Quilter, in contrast, runs an independent network alongside its restricted proposition, and individual advice firms can have their own processes in place when it comes to choosing whether to use discretionary business Quilter Cheviot.

For its national advice business, Quilter Private Client Advisers is focused on the high-net-worth end of the market so the majority would be DFM candidates anyway. But as that business, which has just brought Lighthouse and Charles Derby into its ranks, expands more into the mass affluent, Quilter says that referral system is moving up the agenda – albeit at an early stage currently.

A former Quilter staff member tells Money Marketing that could be an important conversation; what they call the “Spartacus” effect will inevitably lead to each part of the chain saying it is where value is added if there is any contention between the business units over referral processes. Whether you can systemise a truly bespoke DFM is very much in doubt, but that’s not a reason for shying away from systemising how people arrive at that DFM.

Separation at Sanlam

Another vertically integrated business that offers both advice and discretionary management is Sanlam. Elliott Silk, who heads the firm’s wealth operations in the south, says around 70 per cent of business from the group’s restricted planners “will touch Sanlam in one form or other” – through either its funds, wrap products or DFM.

Although Sanlam advisers do not receive additional remuneration for placing business within the group, they get a 20 per cent discount on fees for its DFM service compared to third-party advisers.

Sanlam advisers can decide themselves on what initial and ongoing fees to set, and charge a ‘strategy fee’ of between £750 and £3,000 to cover the cost of initial meetings, research and other work up to issuing the suitability report.

However, Silk insists that clients come first in the decision to place business with its in-house managers, and that advisers can go whole-of-market if necessary.

“For certain needs we use a Quilter or someone like that because it is a better-suited DFM; it’s got to be right for the client.”

Because the group sets minimum fees for its DFM service – £2,400 for Sanlam clients and £3,000 for those who come from external advisers – this discourages lower-value clients who may not need to be recommended bespoke investment management because it would eat up a significant part of the client’s assets. Normally, clients would need £300,000 in assets across any wrapper to become a Sanlam discretionary client, but this is not a hard-and-fast rule.

“If someone has £100,000 and is investing in a DFM, it works out expensive for them, so it’s unlikely we would have the client go down that route,” Silk says.

“If you use a DFM with us, it can be cheaper than a model portfolio in terms of total cost; it will normally come in at around 1.5 per cent per annum.”

If a client is particularly keen to access Sanlam’s investment expertise, Silk notes that, because it runs its own funds, they can do so through its multi-asset funds as well as via a more full-fat discretionary approach.

Some offices in the Sanlam network have as much as 90 per cent of clients coming direct, but Silk says a benefit of the group is that investment managers can discuss the need to see a planner when key life events arise, such as retirement, crystallisation of pension funds or inheritance tax changes.

“Portfolio managers are not generally IFAs,” Silk says. “Some have swapped sides but then they don’t want the risk there.”

How Quilter makes the discretionary decision

Darren Sharkey, managing director of Quilter’s national advice business

  • Is there a formal asset threshold at which advised clients are considered for discretionary management?

In general, within Quilter Private Client Advisers, we would view a client as being appropriate for a DFM when their portfolio is in excess of £500,000 – this level of investment allows an investment manager to buy direct holdings whilst keeping the portfolio sufficiently diverse. However, our advice is based on the circumstances of each individual client and clients may have other needs that mean discretionary management is the most appropriate solution for them even though their holding is less than £500,000, so Quilter Cheviot’s minimum investment level is £200k. 

  • What other categories or factors are considered in these decisions?

As part of making our recommendation to clients we consider a number of their circumstances. For example their tax situation, any specific investment preferences such as ESG, their desire for an income, or their preference for a bespoke portfolio and a relationship with the investment manager.

  • How often do you recommend using a DFM outside your group, and in what circumstances?

Quilter Private Client Advisers has a restricted proposition, which means our advisers pick from a panel of DFMs in the first instance including Quilter Cheviot. If these were not suitable, they would review the whole of the market and make a recommendation accordingly. The quality of Quilter Cheviot’s team and investment process, our close local working relationships and the discounted pricing we can deliver for clients all combine so that Quilter Cheviot is the most appropriate discretionary management solution for a number of our clients.

  • What proportion of clients are recommended an internal discretionary management solution?

Quilter Private Client Advisers is primarily for high net worth clients, and so for many of our clients a discretionary management solution is appropriate. In 2019, 51 per cent of our advice was to move clients into an internal discretionary management solution.

  • What happens if a client is insistent on using discretionary management?

We would always take a client’s preference into account, but we do need to be satisfied that the advice that we’re given is suitable for the client. If we did not feel that a DFM was suitable for the client, we wouldn’t recommend it.

  • Is there a way direct clients to their DFM arm get referred to their advisers should they need planning?

Yes – where a Quilter Cheviot client has a need for planning, their investment manager would discuss this with them to see if they would like to meet with an adviser, which could be a Private Client Advisers adviser or a third party adviser depending on the client’s need. 

  • What are the additional charges for discretionary management? Is there an additional referral fee for the adviser if they choose DFM route?

There are no additional charges, other than the Quilter Cheviot charge to clients, and this is at a discounted rate . There is no referral fee for the adviser.  

  • How is the potential conflict of interest from recommending a service that generates additional income for the same group of companies mitigated?

We are very conscious of this conflict of interest risk and have a robust range of controls and mitigations in place to manage this risk. Examples include the research and due diligence processes we undertake, oversight of the proposition, independent case checking and use of qualified paraplanners.

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