How important are personal relationships?

A great deal of effort and due diligence is quite rightly being expended on ensuring that contractual arrangements between adviser, discretionary firm and client are right for all parties. There is an argument though that suggests that the personal relationships between the parties are equally as important.

Face-to-face meetings

It is noticeable that the panel work Defaqto is doing for adviser clients does not require us to suggest a final panel. Rather, adviser clients want us to come up with a suitable shortlist. From this point, some of the softer issues come into play, which essentially come under the category of ‘ease of doing business’.

While much of the due diligence can be achieved through quantitative comparisons, we would certainly recommend that this is supplemented with face-to-face meetings and other forms of engagement.

Alignment of interest

Adopting a discretionary firm into the business is a bit like entering into a business partnership. The selected discretionary manager has to be right for clients, but as the advisers, paraplanners and other administrators could be dealing with the discretionary firm every day - hopefully for several years - there must be a comfort that the discretionary manager will be easy to work with. These more subjective issues should not be underestimated.

The first and most fundamental consideration is not to be tempted to work with an organisation which means you have to change your way of operating. There is plenty of choice and competition out there, and you should be able to find a discretionary manager that will dovetail in with your way of doing things.

Confidence in the relationship

There are several things that advisers can do in terms of testing the relationship:

Adviser support: Those discretionary firms that are serious about doing business through the adviser distribution channel will have set up dedicated broker account managers and for the larger firms possibly a broker desk. There should be no difficulty in getting in touch with someone, no matter the issue. Whether it be a request for literature or discussing a date for a meeting, access should be easy.

Information: Discretionary firms should understand the burden of due diligence that falls on the adviser and the regulatory pressure that they are under from the FCA to justify their decision-making. Historically, getting specific information on costs and performance has been difficult with one or two in the past actually wondering why anyone would need to know that information!

Thankfully, things have changed over the past couple of years, but even so if the discretionary manager finds any difficulty in providing exactly the information required, I would think twice about using them.

Maybe it is a personal thing, but I get quite frustrated by the number of websites that have very little information on them - instead, quoting a phone number or email address to contact them for further information. In this day and age, some basic terms and conditions, including costs and charges, and summary factsheets should be a minimum.

Applying your own judgement

The discretionary managers should be in a position where they are prepared for almost all requests, whether they be direct from a private client or from an adviser.

Even if the adviser is employing a third party such as Defaqto to do discretionary panel work, the decision is too important for the adviser not to be involved and to contribute their own judgment to the final decision-making. If necessary, repeat some of the investigation that the third party has undertaken. If you can get a written Service Level Agreement, then all the better.

Testing the relationship

Even after the final decision is made, the proof of the pudding is in the eating, they say. It may be wise to start slowly with just a few clients to see if the service you and your clients are expecting actually becomes reality. If it does, then great. Future monitoring will then largely be about whether they can deliver good client outcomes.

In short, personal relationships should not be underestimated

In summary, employing a discretionary manager is a bit like entering into a business partnership. To help make this a long-term relationship it is important that the adviser (or paraplanner) employs his own judgment in assessing whether the discretionary firm and its main contacts are people who they can easily do business with or not.

If not, no matter how good the investment management is, and the delivery of client outcomes, the partnership is unlikely to last as the slightest problems could be blown out of all proportions.

With good relationships most issues can be overcome. Defaqto would always encourage advisers to meet and communicate with the discretionary firm as much as possible prior to making a decision.