ADVISER INSIGHT 27

citywire.co.uk/adviser I 6 October 2014 I New Model Adviser®

ALLAN STOBOAGL 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