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Advisers seek flexible DFM relationship, says new study

Post Retail Distribution Review (RDR) advisers require Discretionary Fund Managers (DFMs) to adopt a highly flexible approach to agreeing investment mandates in order to meet the varied needs of their client base.

That’s according to new research commissioned by Investec Wealth & Investment, which shows that under their existing DFM relationships nearly all (97 per cent) advisers insist on remaining responsible for assessing the overall suitability for each client based on their tolerance to risk and capacity for loss. 
 
However, when it comes to assuming regulatory responsibility for investment strategy and asset allocation the findings reflect a more nuanced picture, suggesting that IFA requirements vary considerably depending on the circumstances of their individual clients and their business model.
 
On average two thirds (66 per cent) of IFAs reported that they take overall responsibility for agreeing the client’s investment strategy, suggesting that in most cases a DFM’s mandate may cover only part of their overall portfolio.  Furthermore, one in six (17 per cent) advisers said they also remain responsible for asset allocation decisions, implying that for certain clients IFAs retain a high degree of involvement in the investment management process while working with a DFM. 
 
IW&I’s study shows that advisers embrace a variety of structures to underpin their DFM working relationship and often employ more than one depending on the DFM: 45 per cent of advisers use outsourcing agreements, 36 per cent an adviser as agent and 35 per cent favour Tripartite agreements.
 
Regardless of how advisers prefer to structure their relationship with a DFM, the majority (84 per cent) of IFAs use Discretionary Fund Managers (DFMs) to reduce their potential exposure to regulatory risk.
 
Mark Stevens, head of intermediary services, Investec Wealth & Investment, says: “This study clearly shows that the needs of advisers and their clients are far from homogenous and DFMs have to adopt a flexible approach if they are to develop successful partnerships.  This echoes our own experience of working with IFAs over many years.
 
“DFMs that take a ‘one size fits all’ approach to working with advisers ignore the often complex and varied requirements of their clients that is only properly exposed through providing suitability advice.  Flexibility sits at the core of our proposition as it enables the IFA to determine the mandate and the DFM to focus on managing each client portfolio in accordance with what has been deemed suitable.” 
 
The research showed that more than half (54 per cent) of advisers outsource their client’s investment management to a DFM, an increase of six per cent from 2012 when 48 per cent did so.  

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