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Adviser Workshop: How to conduct due diligence on DFMs

Adviser Workshop: How to conduct due diligence on DFMs

Robert Dimbleby

Paraplanner, Harrison Beale & Owen

The ultimate goal for us is finding a discretionary fund manager (DFM) that is appropriate both for us and for the client.

Do your research

We went through our proposition in July and did a full review, and decided we wanted to make greater use of DFMs.

We use Defaqto’s DFM ratings as a starting point, and we use that to filter down what we want and how it ties into what various DFMs are offering in more detail. When looking at their proposition, the important thing is access. We use platforms, so we want to see which platforms they use and whether they sit within our parameters.

We will then look at charges. We look at how much the DFM is charging and how appropriate it is for our client base.

Narrow it down

We prefer DFMs with no provider bias, so we know they are looking at the whole market, and it is vital they have a proposition we understand and can explain to a client very simply.

Our main criteria are that they have assets under management of more than £2 billion and at least a five-star rating with an independent ratings agency like Defaqto.

From this point we will assemble a shortlist and do face-to-face meetings with those DFMs, which is really useful to get under the bonnet of what they have, whether it makes sense to us and whether it will to our clients.

Tracey Evans

Director, Juno Wealth Management

We are an evidence-based firm, so we only use DFMs when they are required to meet a specific client need.

We typically use DFMs when we are putting an AIM portfolio together for inheritance tax (IHT) planning, as we cannot give clients access to this through our centralised investment proposition.

Meet client needs

We have a due diligence document that we refer to and use in conjunction with the Defaqto research tool initially.

As we are evidence-based we tend to use passives and smart passives like BlackRock and Vanguard, but when there are specific client needs and we are looking for DFMs, we tend to go for recognised and reputable players like Brooks Macdonald and Charles Stanley.

Do your own due diligence

My main piece of advice would be not to get anyone else to do your due diligence. Defaqto has a lengthy document that aims to provide a whole solution on DFM due diligence if someone is a novice, and I would encourage advisers to read that as a starting point.

We refer to that every year when we do our due diligence. The only possible downside to this is that it is great exposure for larger DFMs but smaller ones do not often feature.

Also, we ensure we document our processes and record every step we take.

Graeme Mitchell

Managing director, Lowland Financial

There are two distinct approaches to DFMs. One is catered for by the likes of Parmenion or Financial Express, whereby you access their service via a platform.

For instance, I can look at the Financial Express portfolio for a medium-risk client and I can run through all the performance details and see if it is suitable for that client.

Do what works for you

We have used Parmenion and Financial Express in the recent past primarily because they are transparent and this fits in well with our processes. That way, I can see what they are doing and I am in control if I do not like it or think it is too risky and want to change.

A more traditional DFM is essentially a stockbroker buying shares based on the house view, with a degree of individual overlap in terms of what the client wants or intends to avoid. I would suspect that when you have a house view, the majority of the portfolio is replicated across the board.

Develop trust

If a new client needs a DFM I like to meet with said DFM and the client, to build up trust and establish a relationship, so that I know I can trust what they are doing. It means I can ask the DFM to explain certain topics better if I can see it is going over the client’s head. It also shows the client that I am working on their behalf.

THREE TOP TIPS

  • Robert Dimbleby: Ask yourself whether you can explain the DFM’s offering to your grandmother.
  • Tracey Evans: Have a clear document to refer to and record your processes accurately.
  • Graeme Mitchell: Meet face to face with the client and DFM to build trust and ensure transparency.

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