Thankfully, in my experience at least, the days of advisers using a copy of Money Management, a ruler and a highlighter pen to make investment decisions have largely gone. However, there’s no doubt that the disciplines of financial planning and investment management require different skill-sets, knowledge and experience.
Even for the purest planner, investment decisions will usually need to be taken during the advice and implementation stage of the financial planning process. That naturally leads to two options; manage investments in-house, or outsource to a third party, typically a Discretionary Fund Manager (DFM).
Let’s look at both in more detail.
Most financial planners aren’t experts in investment management. Nor is it possible to be a part-time investment manager and a full-time financial planner. If you are to successfully manage money in-house it’s vital you invest in the resources and people, who are suitably qualified and experienced to take on the role.
The financial commitment isn’t insignificant, which probably means your business will have to be of a certain size, with sufficient profitability to cover the additional expenditure, if you are to consider this option seriously.
When you start out on this road there are also practical challenges to overcome; you have no track record, buying power or potentially discretionary licence.
Time may overcome the first two.
However, the lack of a discretionary licence creates logistical issues around client consent and can create a heavy administrative burden. Of course, a discretionary licence could be sought; although that comes with additional regulatory and capital adequacy burdens.
The outsourcing of investment management to DFMs has gained traction over recent years.
Again though, this option isn’t without its challenges. It certainly isn’t a simple matter of delegation as I fear some advisers believe is the case.
I could write a far longer piece on the factors a planner should consider when selecting a DFM. However, in a quest for brevity I’ll restrict myself to a few simple thoughts.
Firstly, the DFM must fit your business in every way. From culture and beliefs; they need to be used to working with planners and understand their role, to practical issues such as ensuring their investment options map easily to the outcomes of your risk assessment process. Of course, track record is important, but I do worry about the temptation to focus too heavily on the quantitative side of the equation and less on the qualitative.
Secondly, strategic terms. What will the DFM cost? And, what will the effect of their charges be on the total fees paid by the client? There’s no doubt that the regulator, rightly so in my view, has got fees in their cross-hairs.
Thirdly, the relationship needs to be commercially viable for both parties, as well as your clients. And your business needs to be important to the DFM.
Finally, a watertight agreement between the DFM and the planner needs to be put in place. Among other things, it should cover the responsibilities of both parties, commercial terms and how they disconnect should it ever become necessary to do so.
What’s right for your business?
Whichever option you choose, the result must free up your time. So, you can do what you do best; planning, leaving the experts to do theirs, investment management.
The decision-making process isn’t straightforward. And while more planners are certainly outsourcing, they can delegate, but they can’t abdicate responsibility.