Following on from my blog last week [Kick the tyres of the tyre kickers] which referenced the fact that many financial advisers are feeling the strain of managing investments in-house but find choosing an out-sourced DFM a minefield, we’ve had some further thoughts.

We’ve done our best to resist saying that the simple choice is to opt for PortfolioMetrix but advisers who are struggling to decide on the way forward can benefit from taking a dose of their own medicine and get some truly independent advice on the subject.

Although we estimate there are around 250 firms offering some sort of investment sourcing service to financial advisers, few are truly independent.

However, we have come across one that is and that’s Diminimis (www.diminimis.com). Last year they worked with the Personal Finance Society on a paper called ‘Adviser research & due diligence on discretionary investment managers’.

It’s an interesting and useful read and I’d urge any adviser currently chewing over what to do about out-sourcing investments to take a look.

One thing that comes across very clearly in the paper is the distinction between a discretionary investment manager (DIM), which provides a service and a discretionary fund manager (DFM), which provides a product. Often there is confusion about these terms, with many people referring to DFMs in relation to any business that offers third-party investment solutions. At PortfolioMetrix we describe ourselves as a DIM but because we are a hybrid between a DIM and a DFM it’s not really a true definition for us…but we digress.

The section on liabilities in the PFS/Diminimis paper is particularly interesting (dare we say alarming?). Here’s a snippet:

The Liabilities

By getting it wrong, firms expose themselves to claims and complaints when investments do not perform. The types and sources of the liabilities may surprise the firms, and their PI insurers.

When the DIM adopts the client direct – thereby (apparently) de-risking the adviser’s business:

·         It may struggle to discharges its duties to the individual investor to ensure a suitable portfolio and transactions, especially when running a model portfolio service. An agreement by which the adviser takes certain responsibilities may not be effective in responding to complaints by an investor. If the DIM’s performance drops, it could face a ‘bulk complaint’ from all the adviser’s clients.

·         When the adviser acts as an agent of the client, aiming to keep control of the all-important client relationship, it will struggle to discharge its duties to ensure the suitability of what is, by definition, a discretionary service to be provided by the DIM. If the DIM agrees in writing with the adviser to treat the investor as its client, the ‘agent as client’ model breaks down and the DIM will find itself directly responsible for ensuring the suitability of its service to a client it may never have met.

If this leaves you wondering what the solution is, please come and talk to us. PortfolioMetrix can tick all the boxes raised in the paper, including the thorny subject of ‘suitability’. Unlike many DIMs/DFMs we will take responsibility for suitability of investment selection.

It’s an important issue that really does have the potential to make or break a business…and a broken business is a very bitter pill to swallow.