If you run a centralised investment proposition (CIP) you may be thinking about expanding your services to become a discretionary fund manager (DFM).
In many respects there is no better time to become a DFM. More than ever before, people are seeking reliable, trusted, experienced professionals to guide their assets through what is undoubtably going to be a challenging time economically.
It can also help make your own practice much more efficient because it can be faster and easier to switch within a discretionary mandate. If you operate an active CIP, this can be important. Clients should see the benefit if you are able to skilfully and rapidly manage assets in a turbulent time for the markets.
If it was all that easy everyone would be doing it.
The fact is, the responsibility of being a DFM is huge and there are quite rightly many important compliance requirements you need to know about so you get off to a positive start.
1) Philosophy and procedures
To become a DFM, your firm must have at least two competent individuals who hold the relevant qualifications for discretionary management. At least one of these should always be available during business hours. This is to ensure you aren’t left without a qualified individual to trade. Also, before you ‘go DFM’, you’ll need a clear investment philosophy that is professionally and accurately documented.
2) Icaap and Pillar 3
The Internal Capital Adequacy Assessment Process is an internal assessment of the key risks within your business model to establish whether additional capital above the base requirement needs to be held for mitigation. This is a ‘live’ document – and a process – that will need to feed into your risk framework and must be reviewed and updated at least annually.
You’ll also need to publish your Pillar 3 assessment on your website.
It’s worth remembering that the Icaap must be independently challenged, usually by your auditor or a qualified compliance consultant. To keep you on your toes, the FCA will undertake supervisor reviews and evaluations to ensure compliance.
3) Client reporting
Periodic reporting for discretionary managed portfolios has been around for a while. Put simply, clients need to know where you are up to with their investments. Client reporting was further enhanced with Mifid II, which brought the requirement to report falls in increments of 10 per cent within discretionary portfolios. Although the FCA has shown some degree of flexibility recently, due to the impact of COVID-19, it’s still an important action to take.
4) Pricing and service proposition
You need to carefully consider how you are going to price your service. Firms already offering a CIP on an advisory basis often look to provide a new discretionary service without increasing their ongoing fees. If you are planning to charge more for this new service, you’ll need to ensure your new offering is sufficiently enhanced from your existing advisory model to warrant any additional cost.
If a client is receiving a service they are happy with and needs to sign a few forms a couple of times a year, why pay more just to avoid signing these forms? With the FCA increasingly looking at value for money from advisers, firms will need to consider how an increase in costs will be viewed.
It’s also worth considering whether a client base holds enough clients who would actually be attracted to an in-house DFM solution. Could a better solution be an outsourced one?
Finally, consider the additional cost of VAT to the client. Discretionary management is a VAT-able service; therefore, even if the firm’s fees remain the same, the cost of the service to the client will be increased by 20 per cent at current rates.
5) Finally, remember that it’s your own investment too
Becoming a DFM requires a commitment of time and cost at the outset, which, in reality are unlikely to be recouped for a number of years. You should consider this should view them as an investment in your business and don’t just pass them onto the client.