“Building properly diversified portfolios is paramount and having the risk systems and expertise is an essential part of any MPS solution."
The right relationship
The DFM should be crystal clear on what the portfolio is setting out to achieve, while the adviser needs to make sure their clients are in the right mandate on a continual basis.
The relationship can also be different between the DFM/adviser/client depending on the contractual model – reliance on others or agent as client.
Morrow says: “Ultimately, in both models, the adviser holds the primary relationship with the client, and an important part of the relationship is establishing the roles and responsibilities up front.
“The DFM can support the adviser through volatile markets, so initial due diligence and partnering with the right DFM culturally is an important step.”
Craig Wright, managing director at Evelyn Partners, adds: “The portfolios will have a mandate and the mandate will have a tolerance to risk. This might be probability of loss, guideline equity weights, restrictions on credit ratings etc. They also should include the DFMs attitude to liquidity, gearing in the funds used, use of investment trusts, that type of thing.
“The DFM’s responsibility is to maintain the portfolio in the risk tolerance of the mandate and get the best possible returns for the risk taken. The adviser’s responsibilities include selecting and monitoring the DFM and putting the client in the correct risk-rated MPS and monitoring its appropriateness regularly.”
To make the adviser’s work less cumbersome, IFAs should seek out DFMs that are accessible and agile in their response to the adviser’s changing client needs.
Lewis Hamm, chief executive of O-IM, explains most DFMs will have portfolios designed for each risk profile and will measure themselves against an appropriate benchmark so the risk profile is likely the simplest one to match.
However, income requirements then vary as they largely depend on a client’s personal situation and how best they can take income.
For example, if the client has a large capital loss on an account but is currently drawing a taxable income, they may wish to sell assets on a regular basis to provide that income, as capital gains tax can be offset.
Hamm adds: “An accessible DFM who is able to engage with the adviser for specific client needs and who can create bespoke solutions can greatly assist an adviser when they are trying to place a solution.”
Another consideration is ensuring that the DFM an adviser uses does not negatively impact the relationship with their client.
Wright says: “DFMs are very conscious that the client is the IFAs client. In MPS on platforms the DFM operates typically under the agent as client process, meaning the adviser is acting as agent of the client, so therefore there is absolutely no client contact with the DFM.
