8th January 2013

Does it make sense for IFAs to assume discretionary powers?

A vital factor for many advisory firms is to ensure that, as far as possible, they maintain control of their investment proposition and how it is delivered to their clients.

Over recent years there has been a growing trend amongst adviser firms to outsource to discretionary managers.   Indeed, many established discretionary managers who have traditionally served the high net worth market have developed propositions to meet this demand. 

For many advisory firms outsourcing may free up time to focus on delivering investment advice, but it does not necessarily fulfil their requirement to maintain control of their investment proposition.  Many are looking for alternative routes, hence, another trend is emerging in which advisory firms themselves are seeking discretionary permissions for their own in-house solution.  Currently 2% of IFAs hold discretionary permissions, but anecdotal evidence suggests that more are investigating the steps to take should they wish to pursue this course of action.

There are some compelling arguments:

• Cutting out the middleman places control of the client relationship squarely with the advisory firm;
• Similarly, there is greater control of the investment proposition: how it meets client needs, portfolio construction, where assets are invested, the relationship with underlying fund providers;
• There is potential to deliver superior client service; and
• Scope to secure more of the value chain, generating greater revenue and increasing business value.

This choice however, requires advisory firms to make significant changes to their businesses and comes with considerable responsibilities and risks.

The first requirement is for the right resources.  At least one person has to have the relevant skills and qualifications and the firm needs the appropriate FSA permissions to conduct investment management.  This has implications for capital adequacy, regulatory reporting and PI cover and calls for a different infrastructure – one that facilitates the appropriate compliance and legal and operational monitoring that is required to support investment management. 

Some advisory firms may look to outsource the operational side of delivering their investment management proposition to third party providers.  This automatically demands responsibility for conducting thorough and ongoing due diligence.  The right party also has to be found to handle client monies - the custodian.  Also discretionary managers are obliged to adhere to far more onerous client reporting rules.

Looking ahead, it is also important to recognise that client expectations need to be maintained.  There is no hiding place during periods of underperformance. 

For those firms equipped to manage a discretionary business model, this route may represent the future - and there are providers who can support them in achieving their goal.  For the majority however, it is likely that there are other ways of retaining control of their investment proposition without having to take on the responsibilities and risks previously outlined. 

It’s ‘horses for courses’ and there are now a number of providers, including investment managers, able to provide services ranging from administration to investment management to compliance and supervision who are champing at the bit to support advisory businesses as they develop their own ‘in sourced’ investment propositions. 

Rebecca Murphy, Director - North Investment Partners

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