Moving from an Advisory to Discretionary investment proposition

Gustavo_Fring

Hello, we currently have a centralised investment proposition and manage our client's investments on an advisory basis. We are exploring the possibility of moving to a Discretionary proposition, primarily for business efficiency reasons. Has anyone been through this transition before? I would be interested to hear your experiences, in particular:

1. How did you communicate the change to clients? Were they receptive?
2. What % of clients moved to discretionary?
3. How did you justify an increase in costs to clients? i.e. additional VAT. I think this is easy for our clients who are time poor and do not have the time or inclination to get involved in investment decisions but for others, it's tricky.
4. Did you maintain an advisory service as well? If not, what happened to those clients who weren't suitable or who didn't want a discretionary service? I think we have to run two services, or we lose a large % of our clients. Can't just move clients if it isn't appropriate for them,

Any comments gratefully received.

Thanks

Nathan

Personally, I wouldn't move to a discretionary offering, DFM's are expensive and deliver very little in the way of value for the additional costs.

Research the various Multi-Asset and Multi-Manager offerings available, blend a few and make that your CIP. Providing you can prove that you have filtered the whole market, you are still being independent, you take away the issue of running portfolios and you have effectively employed people that are far better resourced than the likes of a DFM.

arongunningham

1. At face to face Annual Review meetings (so not en masse), plus of course introducing the new CIP to new clients. I can't think of any that couldn't see the benefit.
2. 90%
3. Paying more for more service. The process normally excludes using a platform, except for SIPPs, so the overall costs aren't extortionate. You can negotiate with the DFMs if you foresee a long-term influx of business.
4. Yes. I don't think you can avoid the need to recommend funds yourself. Some products can't use DFM, for example.

I appreciate @Nathan's comment isn't an uncommon one, but I'm genuinely interested to see factual information on the basis that DFMs don't offer value. If that was true, surely they wouldn't exist?

Gustavo_Fring

Thanks for the comments so far. I should clarify we have an internal team currently running model portfolios on an advisory basis. What we are looking into is the prospect of continuing to manage these portfolios internally, but on a discretionary basis.

benjaminfabi

"We are exploring the possibility of moving to a Discretionary proposition, primarily for business efficiency reasons."

If this is the main driver, and client costs are increasing because of it, I would challenge how it can be suitable for any client.

I'd suggest you properly establish how much additional cost the client will need to pay to account for the increase in your business costs to continue with advisory approach (I assume this is Mifid II related). I'd expect this to be a fixed cost per portfolio/wrapper. Then you can use this to demonstrate why a switch to an alternative is or isn't suitable ie it will/will not be reducing overall costs.

You can communicate this as part of the mandatory annual suitability assessment. Because you'll be able to confidently tell them that:

the existing solution (ie your advisory portfolio) is no longer cost effective and therefore less suitable than what you are recommending. Or

they need to pay more but it's still cheaper than moving (as a fixed cost, it will be cost effective for larger value wrappers to pay your increased costs compared to a % of assets in DFM).

You will have a problem with CGT for some clients. You will have to run a bespoke advice model for them unless they are prepared to pay tax or the DFM is able to take over these portfolios on a tax driven mandate (assuming these are less than the additional cost of your service as above). But I suspect this is an off the shelf model portfolio service you're plugging into?

"Can't just move clients if it isn't appropriate for them."

Spot on. And to demonstrate suitability is going to involve some heavy lifting. There is a clear danger of shoehorning. If the elephant in the room as that the business costs have increased, and you're trying to look at ways to reduce them, you have to know what that means in pounds and pence to every client. Because if the suitable outcome is for them to pay more by increasing your advice fees and staying in a advisory portfolio, then that's the right outcome.

Gustavo_Fring

@arongunningham said:
1. At face to face Annual Review meetings (so not en masse), plus of course introducing the new CIP to new clients. I can't think of any that couldn't see the benefit.
2. 90%
3. Paying more for more service. The process normally excludes using a platform, except for SIPPs, so the overall costs aren't extortionate. You can negotiate with the DFMs if you foresee a long-term influx of business.
4. Yes. I don't think you can avoid the need to recommend funds yourself. Some products can't use DFM, for example.

I appreciate @Nathan's comment isn't an uncommon one, but I'm genuinely interested to see factual information on the basis that DFMs don't offer value. If that was true, surely they wouldn't exist?

We would be using a platform, so this charge would remain static whether on advisory or discretionary.

Regarding point three - Paying more for more service - what is the additional service they are paying for, as this is crucial for justifying it to clients I think? I understand that changes can be made quickly, without the client's involvement, less chance of portfolio drifting etc. Is that what you are referring to?

Thanks again.

benjaminfabi

Paying more for more service is looking at it in the wrong way IMO.

You are changing how you deliver the existing portfolio management because it will be less expensive than continuing to do it on an advisory basis. Or it won't. But either way, the client has to pay more. Unless the business absorbs the cost.

Nathan

I suppose my question is, why are you running portfolios? What research capabilities that you and your team have over and above the likes of an L&G, Vanguard, Premier etc?

@benjaminfabi has said before, we are storing up a whole heap of trouble because all we have seen since the last crisis is positive investment returns leading advisers to believe that they are investment managers.

Performance is the one thing about your business that you cannot control, so why not use the expertise that is available at a reasonable cost to do it for you?

arongunningham

Regarding point three - Paying more for more service - what is the additional service they are paying for, as this is crucial for justifying it to clients I think? I understand that changes can be made quickly, without the client's involvement, less chance of portfolio drifting etc. Is that what you are referring to?

I think it's best to speak to a DFM to answer this. They will get this question a lot and will be keen to explain the difference between discretionary and advisory.

arongunningham

Regarding fees, I wouldn't be surprised if you find you ought to reduce your own adviser fees, since a DFM takes some of the responsibilities away from you.

It would be a hard sell for a client to pay a DFM 0.75 plus VAT, plus 1.00 for ongoing advice.

arongunningham

@Nathan said:
I suppose my question is, why are you running portfolios? What research capabilities that you and your team have over and above the likes of an L&G, Vanguard, Premier etc?

@benjaminfabi has said before, we are storing up a whole heap of trouble because all we have seen since the last crisis is positive investment returns leading advisers to believe that they are investment managers.

Performance is the one thing about your business that you cannot control, so why not use the expertise that is available at a reasonable cost to do it for you?

Isn't advisers believing they're investment managers a reason to outsource to a DFM?

IMO, in a falling market DFMs start to earn their dough. Everyone's a winner in a rising market.

Gustavo_Fring

@Nathan said:
I suppose my question is, why are you running portfolios? What research capabilities that you and your team have over and above the likes of an L&G, Vanguard, Premier etc?

@benjaminfabi has said before, we are storing up a whole heap of trouble because all we have seen since the last crisis is positive investment returns leading advisers to believe that they are investment managers.

Performance is the one thing about your business that you cannot control, so why not use the expertise that is available at a reasonable cost to do it for you?

Hi Nathan, I agree with this and therefore, we have an internal investment management team, comprising managers and analyst,s who research, construct and monitor the portfolios for us. The Financial Planning and Investment Management parts of the business are kept different for the reasons you have said. Sorry if this wasn't clear.

Gustavo_Fring

@benjaminfabi said:
"We are exploring the possibility of moving to a Discretionary proposition, primarily for business efficiency reasons."

If this is the main driver, and client costs are increasing because of it, I would challenge how it can be suitable for any client.

I'd suggest you properly establish how much additional cost the client will need to pay to account for the increase in your business costs to continue with advisory approach (I assume this is Mifid II related). I'd expect this to be a fixed cost per portfolio/wrapper. Then you can use this to demonstrate why a switch to an alternative is or isn't suitable ie it will/will not be reducing overall costs.

You can communicate this as part of the mandatory annual suitability assessment. Because you'll be able to confidently tell them that:

the existing solution (ie your advisory portfolio) is no longer cost effective and therefore less suitable than what you are recommending. Or

they need to pay more but it's still cheaper than moving (as a fixed cost, it will be cost effective for larger value wrappers to pay your increased costs compared to a % of assets in DFM).

You will have a problem with CGT for some clients. You will have to run a bespoke advice model for them unless they are prepared to pay tax or the DFM is able to take over these portfolios on a tax driven mandate (assuming these are less than the additional cost of your service as above). But I suspect this is an off the shelf model portfolio service you're plugging into?

"Can't just move clients if it isn't appropriate for them."

Spot on. And to demonstrate suitability is going to involve some heavy lifting. There is a clear danger of shoehorning. If the elephant in the room as that the business costs have increased, and you're trying to look at ways to reduce them, you have to know what that means in pounds and pence to every client. Because if the suitable outcome is for them to pay more by increasing your advice fees and staying in a advisory portfolio, then that's the right outcome.

Thanks for this. On the CGT point, we are already managing these portfolios but on an advisory basis. We aren't anticipating that our investment team changes the composition of the portfolios just because we are applying for discretionary permissions.

From a business efficiency point of view, we are finding the current process quite clunky.To review and rebalance a client portfolio:

• the adviser puts a request into the Investment team
• they provide trade recommendations to realign the portfolio
• we write a letter to the client giving these recommendations
• the client reads recommendations and gives the adviser permission to proceed
• we then instruct our investment team to make the trades.