Accessibility

01 May 2014

Fraser Donaldson - Insight Analyst - Wealth Management

Since the emergence of platforms over a decade ago, bringing with it open architecture in terms of investment choice, the adviser industry has seen a shift of approach from being product selectors to investment solution advisers. Many advisers now believe that the investment behind the tax wrapper is the key determinant of client goals being achieved, rather than the tax wrapper variant itself.

While there are advisers who still select a tax wrapper first, with the reasonable belief that investment choice will be sufficient no matter which product comes out on top, most of the work we undertake for advisers is based on the ‘investment first’ approach. Throw in platforms as well, and this results in a rather tricky due diligence and justification process.

If discretionary management is the most suitable solution, what considerations and obstacles do advisers have to overcome?

It is probably an accident of history that a significant amount of client assets found its way onto platforms well before discretionary management emerged for most advisers as a real investment outsourcing choice.

For most advisers who conclude that discretionary management is for their clients there are three distinct possible approaches to the advice process, driven either by where the client assets are currently, or whether the adviser believes in investment first or tax wrapper first:

Assets are currently on platform
Assets are liquid and ready to be apportioned
Adviser always selects the product first

There are of course two forms of discretionary management – bespoke and managed portfolio service. Typically, bespoke is not available on platforms but is more likely to be available through both SIPPs and offshore bonds.

Bearing all this in mind, the level of discretionary accessibility depends on the selection process approach.

Product first

Any adviser selecting a discretionary manager as one of their investment solutions of choice needs to be certain that they are able to manage the assets through their tax wrapper of choice.

For those products that are truly open architecture in nature (pure SIPPs and offshore portfolio bonds, for example), the likelihood is that they can accommodate most discretionary management solutions and often on a bespoke basis.

Insights from the Defaqto database show:

With the exception of one provider (a platform), all the offshore portfolio bond providers listed on our database accommodate discretionary managers through at least one of their product variations; these tend to be a panel of selected DFMs rather than open architecture, so suitability of discretionary propositions available needs to be taken into account
Of the 134 SIPPs covered on our database, some 91 say they are open architecture in respect of accommodating discretionary managers and many others offer a reduced panel. Again, for those only offering a panel, suitability of the propositions need to be taken into account

It should be noted that even though so many say they are open architecture in terms of discretionary, there is likely to be an element of basic due diligence carried out by the product or service provider to ensure the discretionary management firm is suitable. Secondly, the consideration of facilitating the solution is likely to be based on the level of demand, so it is not necessarily guaranteed.

Discretionary first

For those advisers who firmly believe that the investment solution comes first (for the purposes of this article discretionary management), it is important that the analysis also takes into account with which products and services the investment firm has relationships.

It would of course be more efficient if the discretionary managers had relationships with product providers (either a panel or more formal arrangements) – this would potentially cut out a stage in the process where discretionary solutions and product solutions need to be researched independently of each other and then matched. This does of course pre-suppose that the products ‘available’ through the discretionary managers are suitable for the client and this is where the adviser comes in to their own.

Of the 178 discretionary solutions Defaqto currently covers, 135 claim to have arrangements with SIPP providers
Of the 178 discretionary solutions Defaqto currently covers, 128 claim to have arrangements with offshore bond providers
If a platform is likely to be the final destination of client assets, firstly it is likely to be managed portfolio services rather than bespoke (although there are some rare exceptions) and secondly there may be discretionary solutions designed specifically for platforms that avoid any compromise investing where the platforms have limitations. Of the 97 managed portfolio services we currently cover, some 80 are available on at least one platform. 37 of the MPS solutions are designed specifically for platforms

Platform first

Many advisers base the decision on what platforms they will use on what their client bank looks like and not necessarily on the individual needs of clients. While some clients are not suitable for platforms, in which case one of the above two processes will apply, many will already have assets on a platform and that platform will be entrenched in the adviser service proposition.

What this means is that the starting point is possibly with assets already on a platform and seeing what products and investment solutions are available from there. We would assume that one of the original reasons for using a platform would already be the availability of suitable tax wrappers.

"Of the 37 adviser platforms currently covered by Defaqto some 22 claim to be open architecture in terms of discretionary managers"

Conclusion

There is no real ‘right way’ to approach due diligence involving the three elements of tax wrapper, investment and administration, but it should be appreciated that the restrictions in choice may vary considerably dependent on the starting point.