Should you consider a discretionary manager?

Defaqto’s Fraser Donaldson takes a closer look at the discretionary management route.

The RDR, together with a series of unprecedented market falls over the last ten years or so, has culminated in many adviser firms considering their stance on managing their clients' investment portfolios.

More and more are choosing to outsource some or all of their investment process to investment professionals. The outsourcing route of choice in recent years has been multi-manager with assets under management reaching record highs.

Discretionary managers have recognised the opportunities in the retail market and are making a concerted effort in winning some of the outsourcing market. Surveys undertaken by Defaqto have seen this outsourcing choice has grown in popularity over the last couple of years, and continues to do so.

Our most recent survey among 232 platform users revealed that 26% employ the service of a discretionary manager. Similar surveys a year or so ago showed figures nearer 20%.

We expect more advisers to outsource investment in the run up to RDR implementation at the beginning of 2013. For many, discretionary management will be the solution of choice. So, what due diligence will an adviser have to go through in order to select a discretionary manager that meets the needs of both the client and the adviser business?

The multi-manager industry is already geared up to help advisers in their decision making. Performance is easily accessible, the fund management teams will probably already be known to the adviser and there is literature and factsheets readily available for most funds. Due diligence on discretionary managers will mean entering unfamiliar territory for many.

The right questions

There are some fundamental questions to ask that may well narrow down the discretionary management universe quite quickly. For instance, will the discretionary manager take on the management of investments within your preferred tax wrappers and even platform where applicable? Many discretionary managers have issues over the custody of assets, which makes it difficult for some to work with platforms.

Is the range of portfolios offered suitable for the majority of the adviser's clients? For example, some discretionary managers will offer an ethical option.

Other simple initial checks would include such things as minimum investment, frequency of reporting and online capabilities in terms of valuation and transaction data. These kinds of simple checks can get the adviser down to a manageable shortlist.

Performance statistics have been notoriously difficult to get hold of from many discretionary managers. The main thrust of effort into the retail market has been through centrally run managed portfolio services. Here, the discretionary manager should be able to provide the adviser with whatever past performance statistics they require. If the portfolios have not been up and running long, ask for supporting evidence from other areas within the discretionary business.

Of course performance on its own is not an answer in itself. This should be taken in context with risk control, investment goals set and targets reached. Satisfactory answers to these questions will give a good guide to suitability.