ADVISER INSIGHT 27 citywire.co.uk/adviser I 6 October 2014 I New Model Adviser ® ALLAN STOBO AGL Wealth Management Advisers who outsource investment to discretionary fund managers (DFMs) are often criticised for jeopardising their client relationships and failing to offer everything in-house, but there are many positives to using a DFM. When we first set up the firm, Glasgow-based AGL Wealth Management, in 2009 we decided to outsource to DFMs, where appropriate, for two reasons: l First, my colleagues and I, all of whom had worked at Royal Bank of Scotland Private Bank, had experience of dealing with high-net-worth clients and outsourcing to DFMs. l Second, my colleagues and I specialised in wealth planning, rather than investment and portfolio construction. Answering the outsourcing critics We felt outsourcing allowed us more time to see more clients for longer to strengthen those relationships. Although we use the term outsourcing, we do not believe we are passing clients onto a third party. I think of it more as insourcing, as we bring the DFM into our business to invest our clients’ money. Clients place great value on the time we spend with them, and by using a DFM, we free up our time to focus on doing more of that. Creating portfolios that meet different client needs is tricky. It takes time and expertise, and can expose the business to additional risk and costs. Some advisers think clients may look more to the investment manager for advice because they are running the money. However, we set the boundaries from day one to ensure all three parties know their position within the relationship. Another criticism levelled at advisers who outsource is the added cost to clients. Bespoke portfolios can be expensive, but they are often used for a specific reason that justifies their charges, such as capital gains tax, stock exclusion or sentiment. Advisers can also reduce the cost of outsourcing by using model portfolios or unitised solutions. Creating a robust offering If you choose to take the outsourcing route, picking the right DFM is an important consideration. We currently have eight investment firms that have passed our due diligence process and offer us a range of solutions covering bespoke, model portfolio and unitised DFM solutions. Our process for selecting a DFM is robust. We start by identifying DFM firms in the market. We then apply filters to reduce this to a manageable size. Some of the appropriate filters are: is the DFM a contributor to Asset Risk Consultants and/or Private Client Indices; what level of assets under management do they have; and what type of Sipp and offshore bond panels are they on. These DFMs will then receive a questionnaire and be evaluated before we create a shortlist. We will meet with the managers at their offices before selecting a panel of DFMs. The panel is maintained through quarterly monitoring, assessing performance, volatility and risk, costs and service. Finding a good fit We are keen to have a range of DFMs that all offer something different. Some will offer lending services, while others allow access to them via a unitised solution. It is important that some DFMs on our panel have a local presence. It is not always about the amount of funds DFMs have under management. We try to match the DFM to our business, for instance sharing the same values and organisational characteristics. From an investment perspective, we will examine the DFMs’ strategy and preference for investment instruments. Some will focus on passive vehicles to keep costs down; others will use collectives; and some will offer direct equity exposure or use investment trusts. Our investment oversight committee meets each quarter to discuss the DFMs in detail. It scrutinises service, performance, risk and charges. We also meet with DFMs that we are not using to find out more about what they offer. Matching clients’ needs With regards performance, we find out what our clients’ expectations are of good and bad performance, and what level of return is required to meet their goals. Cash plus inflation can be seen as a good sign. However, if a client is prepared to take a degree of risk, it is important they are rewarded accordingly. Alternatively, cash plus inflation may not be adequate to meet a client’s needs. We benchmark the DFMs against a range of pre-constructed indices or portfolios we have built that mirror the asset allocation and volatility of the various solutions. These are constructed using a range of indices and allow us to see how the market has performed neutral of costs and whether the DFM is providing alpha and value for money. Allan Stobo is a senior wealth manager at AGL Wealth Management Far from jeopardising client relationships, outsourcing investment through a robust process can strengthen them by freeing up advisers’ time and producing better outcomes OUTSOURCING CAN CLINCH CLIENT LOYALTY WHEN THE DFM IS THE RIGHT FIT Clients place great value on the time we spend with them, and by using a DFM, we free up our time to focus on doing more of that