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IFAs reveal why they picked DFMs as FCA to probe ‘cosy’ relationships

With the regulator set to probe outsourced relationships, Anna Sofat of Addidi Wealth and Carl Roberts of RTS Financial Planning explain what they look for in a discretionary manager

IFAs reveal why they picked DFMs as FCA to probe ‘cosy’ relationships

Picking the right discretionary fund manager (DFM) to look after your clients’ money is one of the most important decisions IFAs make.

Some notable examples of recent DFM failures, such as Organic Investment Management, Beaufort Securities and Strand Capital, have shown how this selection can negatively affect advisers.

The Financial Conduct Authority (FCA) announced earlier this month it will scrutinise the relationship between advisers and DFMs in its post-implementation review of the retail distribution review (RDR). We asked two IFAs how they came to pick the DFMs they use and what goes into their due diligence processes.

Playing catch-up           

Anna Sofat (pictured below), managing director of London-based Addidi Wealth, says the advice profession has been coming at DFM due diligence from the wrong angle.

According to Sofat, advisers have been going through the motions of DFM checks because it is something the regulator has started to ask for. In reality, she says, some IFAs and DFMs enjoy ‘cosy’ relationships, based on personal connections more than client need.

‘Looking at DFM due diligence, it has come about because the regulator started to demand it. That is not how it should be. It is good business practice to do proper due diligence,’ she says. ‘Good businesses should have been doing that for years. But instead, you had quite cosy relationships between many IFAs and DFMs. You get wined and dined by them, you get taken out because you put enough business with them, you may even have deals.’

Addidi uses DFMs for certain clients who have a specific objective. For example, for ethical portfolios Sofat uses King & Shaxson, a DFM that specialises in ethical funds.

When deciding to use King & Shaxson, Sofat says she went through a set process that covered: fee structure; manager experience; financial backing; and corporate strength. 

She says she would not meet any DFMs until she had carried out due diligence. 

‘We brought [King & Shaxson] in towards the end of the process. We don’t like meeting anyone early on because you get influenced. However much you think you are not, you do get influenced by your unconscious biases.’

However, Sofat says she was attracted to King & Shaxson because the DFM was taking a positive approach to ethical investing and was choosing companies doing ‘interesting stuff’ with things like social housing.

Proof in the pudding

For other IFAs, selecting a DFM is about finding a company that fits well with their own businesses, which includes the DFM’s style and ethos.

Carl Roberts (pictured below), managing director of Milton Keynes-based RTS Financial Planning, uses Parmenion for portfolio creation, platform and discretionary management. He says one reason he chose Parmenion is because he is a believer in passive investing. He also likes its technology and, as a one-adviser firm, it provides a complete outsourcing package.

‘You have the investment side, but it also has its own platform and it all works seamlessly,’ he says.

When choosing which DFM to use, Roberts says he used Defaqto software to compare its cost, performance and strategy against the major players out there.

However, Roberts says he was aware of Parmenion from a previous experience, and he acknowledged he could have internal biases from this.

‘You could argue it did bias my judgement, but I still have that filter process. There is no DFM out there like Parmenion because of the technology it has.’

Recent regulations, such as the product intervention and product governance sourcebook (Prod), mean there is now more pressure on IFAs to justify their DFM selection from a compliance point of view.

‘With the new Prod rules, there does seem to be a lot of pressure to tick a lot of boxes and go through a process,’ adds Roberts. ‘The proof is in the experience and the customer outcomes. If we have a lot of advised clients and it is working well, that is the best due diligence.’ 

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