In essence there are two types of discretionary solution: bespoke portfolio management and managed portfolio services. The latter can be sub-divided further in to two further categories: MPS direct with the DFM firm and MPS accessed through a platform. This latter is perhaps the biggest development in the retail space.
Most platforms now have a very wide selection of discretionary portfolios to choose from. Novia, for example, have indicated that as much as 70 per cent of new business is invested in model portfolios (fairly evenly split between advised model portfolios and managed portfolios run and traded by the discretionary managers).
For the most part, discretionary managers have learnt quickly that advisers require information to help make their selections. More importantly, they require it in a format that works for them. For their part, advisers are beginning to understand that discretionary managers, in the main, are not building portfolios solely to achieve outperformance. Most discretionary firms construct portfolios in order to achieve a defined outcome for the client or client segment at the lowest possible risk. This is their priority and could mean comparatively lower returns, but at a reduced risk.
It has taken a little while, but advisers are now viewing portfolios in terms of achieving client goals and there is not necessarily any imperative to be beating the competition in terms of absolute returns. Portfolio risk has become much more to the fore in selecting portfolio managers. If client goals are achieved, taking as low a risk approach as possible is more appealing (and defendable) than possibly shooting the lights out on occasions, having a wild investment ride and potentially having it all go wrong at the wrong time for the client.
This changing attitude from advisers has meant that the discretionary managers are much more willing to provide information such as past performance, in the knowledge that it will not be mis-interpreted or mis-understood.
It inevitably took a little time for advisers to understand that they did not have to manage their client’s investment portfolios. Once it was accepted that the best outcomes for clients would be to put client portfolios in the hands of well resourced, full time professionals such as multi-asset managers or discretionary managers, it was difficult to argue against.
Indeed, in many cases it was more a case of persuading advisers to drop a part of their process that they probably enjoyed the most, returning to the fundamentals of financial planning and taking responsibility for sourcing the best investment options for their clients.
This should not be underestimated as a positive reason for outsourcing investment to discretionary managers, and to some extent multi-managers for that matter.
If advisers outsource the investment to a third party there is a subtle, yet very important, shift in the client/adviser relationship. The adviser and the client find themselves on the same side of the table, working together to find the best solution. Difficult conversations with clients are easier if the client and adviser are working together to achieve goals.
