By Simon Bottle, Jun 17 2014 08:42AM
Partnering with a DFM to use their model portfolios can be used as a future proofing route because the adviser’s investment model is ‘restricted’ whilst still providing massively diversified portfolios for clients. To take the EU example, as the MiFID II and IMD II rules stand currently, commissions will only be possible for restricted financial advisory firms once the regulations are implemented. Global regulation generally is moving towards a state where fund picking commissions will be harder and harder to obtain for independent advisory firms due to regulators perception that this creates a conflict of interest. It is likely to be a matter of when not if as the regulatory tidal wave hits HK, Singapore, The UAE and beyond.
Levels of regulation are only going in one direction - up. As a minimum, regulators are moving to a framework where they expect advisers to have an auditable process in place for the construction and ongoing management of a client’s portfolio, and at the outside they’ve got to gauge and record the client’s attitude to risk and match this to the asset allocation. And then over time they have to obviously monitor the client’s changing needs and rebalance the portfolios when necessary. It’s a huge ask. If it’s not done right and things go wrong in the clients’ portfolios then the adviser is exposed to very nasty regulatory risk of fine or other sanction. The PI to cover this type of activity if an adviser retains the responsibility is moving inexorably up.
Small portfolios managed with a number of limited individual investments tend to be dangerously concentrated. If one or two funds have big problems then the whole portfolio can be terminally damaged. We have all on the call had experience in the last couple of years of funds that have basically blown up for different reasons. It’s a huge regulatory risk that needs to be mitigated going forward.
Engaging a DFM de-risks all these financial and regulatory hazards of fund selection for advisers. Why shoulder the burden when it can be assigned to a team of institutional professionals, analysing and researching in detail funds/investments real-time every day, providing a level of expertise at an affordable cost to the client?