Insights | Considering a discretionary solution or not - that is the question

Fraser Donaldson - Insight Analyst (Investments)

The service offered by a financial adviser needs to meet both the clients' requirements and the adviser business's needs. Each adviser needs to decide where to draw the line for the level of service offered for each type of client. In this article Fraser Donaldson summarises some important considerations.

Defaqto took a straw poll at an industry event recently, attended by advisers, asking at what point clients cease to be profitable and consideration is given to dropping them or considering a lighter-touch or even execution-only service.

Responses were very varied, but on average, the tipping point seems to be at some point just north of £50,000 of assets.

What the regulator says

In the final guidance paper FG 12/16 (Assessing suitability: Replacement business and centralised investment propositions), the regulators offer a template for a working investment proposition. Two of the options they suggest that are worth considering for this category of clients are:

• A suite of low-cost managed funds for clients with modest asset levels who required a low-cost ongoing service
• A model portfolio service for clients with a higher level of assets and investment experience, where the additional costs were appropriate

What the figures state

Of the 52 managed portfolio services that Defaqto covers (available direct with the discretionary firms), some 38 are available with a minimum investment of £50,000 or less, while 23 are available with a minimum of £30,000 or less and 19 at a minimum of £20,000 or less.

In addition to this, there are managed portfolio services (MPS) that are available on platforms at even lower amounts. This is evidence that the perception that discretionary solutions are exclusively for the wealthy isn't true - access can be achieved at relatively low investment levels.

Beyond the minimum investment

However, advisers need to consider that each discretionary solution would still require some fundamental service aspects, including:

• Objectively considering a client's needs and objectives
• Collecting the necessary information on a client's existing investments and the recommended new investments, such as the product features, tax status, costs and the performance of the underlying investments
• Implementing a robust risk management system to mitigate the risk of unsuitable advice and poor client outcomes
• Ongoing monitoring of investment options to ensure that they stick to the mandate, which of course should continue to match client needs

In other words, discretionary solutions in the form of MPS should not necessarily be considered as unattainable for clients with lower amounts of assets. They can often be seen as an alternative to the suggested low-cost managed funds.

Service needs may increase over time

While it may be a sweeping generalisation, those clients with relatively low amounts of assets to invest are less likely to have complex financial affairs and are as such potentially ripe for the so-called light-touch financial planning option. This means that advisers will retain control of the client and as, hopefully, their wealth and need for planning increases over time, a more comprehensive service can be offered.