Discretionary Investment Managers on the rise

Leigh Köhler, Head of Glacier Research.

Over the last two years we’ve noticed an increase in requests from investment managers (other than traditional asset managers) wanting to make use of the Glacier platform in order to run wrap funds on behalf of financial advisers. The ensuing due diligence documents didn’t quite encapsulate their offerings and this led us to investigate the trend further and to set up interviews with these investment managers.

The development of Discretionary Investment Managers internationally

Legislation in the UK increased substantially after the Global Financial Crisis and after the Retail Distribution Review in particular, the responsibility of advisers increased along with advice risk. Due to this increase in advice responsibilities they began looking to partner with players in the industry to whom they could defer the investment management decision.

A UK survey amongst advisers sought to determine which strategies they were using post-RDR. The results showed that over 70% were using strategies that involved some form of outsourcing to another party – mainly due to time and expertise factors.

The local situation

Locally, we’ve also seen regulation’s effect on advisers, and how they’ve come under increasing pressure. Trends here are very similar to the UK, with advisers seeking to outsource the investment management portion of their practice to a third party.

Who are these entities?

We refer to them as Discretionary Investment Managers (DIMs) - defined as an individual or firm with multi-management experience and with the relevant Category II investment licence.

The offering

DIMs have the expertise to manage the investment books of advisers’ practices in a discretionary fashion. They either take over the function completely, or they act in an advisory capacity where they partner with the adviser.

The solutions are either model portfolios or tailored solutions – in the form of wrap funds – for the adviser’s business.

What have we seen so far?

We’ve seen a relatively aggressive move of independent firms, platforms, multi managers and small asset managers into this space. We also see DIM firms preparing their businesses for a UK-type RDR outcome, i.e. a resultant large demand for their services. They’re currently aggressively targeting independent financial advisers with medium to large books.

Selecting a DIM

Because advisers are being targeted aggressively, they need to carefully consider which one of the many DIMs would be the best partner for their business.

When selecting a DIM, both investment and operational capabilities are important.

Investment capability

The investment capability of the DIM incorporates:

• Philosophy
• Portfolio construction process
• Relevant experience and qualifications of the Portfolio Managers
• Quality of the investment teams
• Structure of the Investment Committee meetings – how are they run and who is involved?
• Product offering – are they offering model portfolios or tailored solutions?
• Asset Manager research capabilities – do they have complete industry coverage and both qualitative and quantitative research abilities?

When selecting a DIM, the adviser must be comfortable with the above key points. Is the DIM able to adapt to your existing processes or do they merely dictate how things should be done? It’s important that they understand the retail space and the flexibilities required.

Operational capability

Compliance is important – both upfront and ongoing. Upfront compliance includes the development of investment mandates, client mandates and SLAs. Ongoing compliance will include Regulation 28 and investment mandate breaches and liquidity management.

The DIM must have strong legal and compliance teams to ensure solid upfront and ongoing compliance.

Administrative capabilities include:

• The quality and frequency of reporting is important.
• Asset Manager interface – does the DIM have strong relationships with Asset Managers and the ability to negotiate better fee classes?
• Platform interface – Not all platforms are created equally and DIMs need to understand the transactional capabilities and limitations of the different platforms as they’ll need to align the client experience across these different platforms.
• The capacity and scalability of the DIM is also important. Can they take on more clients and maintain the same service level?
• Is there a key man risk?
• Fees – these vary significantly so advisers need to understand the total cost of the service provided.

The future

Advisers should not underestimate the impact that DIMs can have. In selecting a DIM, choose one that aligns with your own investment views, philosophies, processes and values.

We believe that those who’ll survive into the future will be those that offer both superior investment as well as operational capabilities. We expect to see an increase in the number of DIMS locally, as regulation increases.

Know who, and how, to select.