Discretionary Fund Managers

wiltshiregirl69

I'm looking on line for a good local firm who will help with investment choices for me. Can someone explain exactly the difference between:

1. IFAs
2. Wealth Managers
3. Discretionary Fund Managers

I consider myself fairly well educated beyond degree level and still for the life of me cannot understand the whole picture of who you go to when. All want to take a good percentage cut of your capital. Which ones take on clients directly? And which do not. And if you instruct an IFA to look holistically at all your financials ,and they propose investments (for a substantial charge) are they tied in (or aligned with) with a particular discretionary fund manger company. If so, do you pay more than going to the DFM directly.

dunstonh

1. IFAs
2. Wealth Managers
3. Discretionary Fund Managers

1 - Independent financial advisers. Able to arrange investments on a transactional basis (ad-hoc, one-off) or ongoing advisory basis (need your permission to make changes) and must be from the whole of market.
2 - Wealth managers. Much the same as IFAs except it's a marketing term rather than a regulated term. Usually used by expensive restricted FAs to try and distract from the fact they are not independent. The general rule of thumb is to avoid firms referring to themselves as wealth managers.
3 - DFMs. Mixed bag on this. DFMs can make changes without your permission. Many DFMs just add an extra layer of charges for absolutely no added value. However, it is possible for some IFAs to use low-cost DFMs to implement some very good value portfolios So, it can be viable in some cases but extremely expensive and pointless in others.

DFMs are not advisers. So, you will not get regulated advice from them unless they happen to have an advisory arm. In which case it will be a restricted advice service with additional costs at a level that is probably more expensive than a typical IFA.

And if you instruct an IFA to look holistically at all your financials ,and they propose investments (for a substantial charge) are they tied in (or aligned with) with a particular discretionary fund manger company.

It doesnt need to be a substantial charge. What often happens is that firms will price small value cases more expensively (relatively speaking) as they don't really want them. Some won't get out of bed for under £250k.

They key thing is to remember that the term IFA covers many different models. Some will be boutique investment adviser firms that only want high net worth clients that buy into their cashflow modelling software and reporting. Some will be general practitioner IFAs. Some will a particular focus on certain areas based on their location. City firms get a certain type of client that is often different to the rural firms. For example we are rural and we get clients popping in for a cup of tea and chat and giving us jars of jam or runner beans, bottles of homemade wine, etc. And being rural Norfolk, everyone is related (although not as much as it used to be) and you end up doing lots of little things for family members at little or no fee income because you are the family IFA. Things are not at all formal. Whereas a city firm is likely to be more business focused in approach and more visually professional. i.e. laptop out, slick presentations in a very smart office etc.

A rural client may not appreciate the more business-focused approach of a city firm and a city client may not appreciate the rather more casual approach of the rural firm.

Some clients ask the IFA how much they can spend on holiday next year. Or when they can buy their next car. Some just use them for investment advice. The service you want and you can get can vary significantly and many IFAs will cover all types of client needs. Some will not.

Wildsound

1) IFAs - use (some might be "restricted whole of market" which is fine, it just means they might not touch upon certain aspects of financial advice such as EIS or VCTs, but by doing so means they can't called themselves Independent).

2) Wealth Managers - AVOID (one that comes to mind which sounds very similar to the most senior royal palace of the UK)

3) DFMs - added layer of interference with your investments. For 95+% of people, it's not needed. However, they are particularly valuable for people with more bespoke requirements (which an IFA should be able to identify). We had a very wealthy client where they had considerable assets abroad including American and European property. A "well diversified multi asset portfolio solution" for their UK based investments was deemed unsuitable in their case and we sought a DFM to provide a unique investment portfolio which catered towards their requirements.

dunstonh

1) IFAs - use (some might be "restricted whole of market" which is fine, it just means they might not touch upon certain aspects of financial advice such as EIS or VCTs, but by doing so means they can't called themselves Independent).

The problem with "whole of market" restricted FAs is that it may start by just eliminating certain high risk transactions but it tends to suffer mission creep. Its mainly networks (appointed representatives) that went from IFA to FA with limited restrictions but then they started introducing their own-branded funds and centralised research that their advisers had to follow and then restrictions on providers.... and then it just ended up looking like a panel.

Of course, this a problem with trying to avoid generalisations. There will be a small number of genuine restricted FAs who do only restrict the high risk stuff and meet the IFA classification as it was in 2012 or earlier but dont meet the 2018 classification.

Wildsound

dunstonh wrote: »

The problem with "whole of market" restricted FAs is that it may start by just eliminating certain high risk transactions but it tends to suffer mission creep. Its mainly networks (appointed representatives) that went from IFA to FA with limited restrictions but then they started introducing their own-branded funds and centralised research that their advisers had to follow and then restrictions on providers.... and then it just ended up looking like a panel.

Of course, this a problem with trying to avoid generalisations. There will be a small number of genuine restricted FAs who do only restrict the high risk stuff and meet the IFA classification as it was in 2012 or earlier but dont meet the 2018 classification.

I agree, I think it's probably most common when small practices encounter issues when they try to scale up, and so take shortcuts by making efficiencies by cutting out bits of niche advice at first, then streamline their main propositions too much.

For the OP, if it was me and I was to come across a FA with restrictions, I would look to see if they had whole of market status on the areas of advice which I required. If I was seeking advice on my investments and pensions, and they provided restricted mortgage advice only, it wouldn't concern me.

wiltshiregirl69

Thank you all - very very helpful. Without meaning to sound very stupid - how do you tell the difference between a financial advisory firm which is restricted and one which is not. What precisely does restricted mean?
Do IFAs (even if in theory they are independent) tend to be 'unofficially' tied in with a certain fund group - e.g. Blackrock etc - because they have some sort of business understanding with them - it is this bit I really don't get. Aren't IFA firms feted by the big fund houses somewhat which could potentially make them less than fiercely independent. I am not meaning to criticise the FA professional at all - just trying to make my choice of one as straightforward as possible by knowing the background.

A good example is that after spending hours looking on-line I uncovered a good looking local firm https://theprogenygroup.com. I cannot tell from their website whether they are wealth managers, tied FAs or IFAs.

coyrls

wiltshiregirl69 wrote: »

A good example is that after spending hours looking on-line I uncovered a good looking local firm https://theprogenygroup.com. I cannot tell from their website whether they are wealth managers, tied FAs or IFAs.

Given the difficulties of finding any reference to IFAs on their website, I would assume that they are not IFAs and fall into the Wealth Management category.

dunstonh

Without meaning to sound very stupid - how do you tell the difference between a financial advisory firm which is restricted and one which is not. What precisely does restricted mean?

There are two types of adviser. Independent and restricted. If they say they are independent (and their terms of business must show their status) then they are independent. Most restricted advisers will not use the term "restricted" in conversation. Although their terms of business must state that they are and what restrictions they may have.

Most restricted advisers will not refer to themselves as restricted in conversation. They are not required to use that word in conversation. They wont use the word independent as that is protected. However, they may use other words like whole of market in the areas we look at. or unbiased in our selection.... Or as someone told me recently about what a single tied adviser (one company offered only) had told them... he gave advice from products that had been researched centrally from the best in the market and they had picked the best managers to run their funds.

Over half of people seeing restricted FAs think they are actually seeing an IFA (research from a number of years back). If the adviser cannot provide proof of their independent status then they are not independent. It is as simple as that. IFAs will go out of their way to state they are independent. Restricted will go out of their way to avoid using the word independent.

Do IFAs (even if in theory they are independent) tend to be 'unofficially' tied in with a certain fund group - e.g. Blackrock etc - because they have some sort of business understanding with them - it is this bit I really don't get.

No. IFAs cannot restrict in any way. If they do, then they cannot refer to themselves as an independent. There really is no grey area here. It is either an IFA or an FA.

No commercial relationship must exist between fund houses, providers and platforms with advisers. That was banned in 2013. It was known as pay to play. However, some providers and a number of platforms will offer IFAs special terms on client charges. That is common and allowed as it drives consumer costs lower without creating bias (as the IFA still has to run the research against others)

Aren't IFA firms feted by the big fund houses somewhat which could potentially make them less than fiercely independent.

We get reps from the fund houses calling or visiting. However, they cannot offer anything to an IFA with a value over £25. Most of the time, the reps are a hindrance and you look to get off the phone as quickly as possible and tell them not to visit. Most fund houses now limit themselves to emails and only a few have active contact.

A good example is that after spending hours looking on-line I uncovered a good looking local firm https://theprogenygroup.com. I cannot tell from their website whether they are wealth managers, tied FAs or IFAs.

Remember what I said above. If they were IFAs, they would go out of their way to say so. If they don't highlight the fact then it means they are not IFAs. There is a caveat to that. A pretty large number of firms are transitioning from IFA to FA. Often as they are being bought out. The larger national/regional firms are active in buying IFA firms and most get converted to FA. At that moment in time, they may be IFA but know they are moving to FA in the future. They will often look to downplay and reduce/remove references to their IFA status whilst they still have it.

Malthusian

wiltshiregirl69 wrote: »

Thank you all - very very helpful. Without meaning to sound very stupid - how do you tell the difference between a financial advisory firm which is restricted and one which is not.

The independent label has protected status and is very valuable. Not for nothing do most MSErs say to people looking for regulated advice "always use IFAs, never use FAs [i.e. restricted advisers]".

This means that if an adviser is independent they will say they are independent - prominently. If they don't say they are independent they are almost certainly restricted.

What precisely does restricted mean?

Independent means they have a statutory duty to research products from the whole of the market and recommend the one that best fits your needs. (Note that this is partly subjective - it doesn't mean you will always be recommended the cheapest provider, for example.) Restricted means they don't.

Do IFAs (even if in theory they are independent) tend to be 'unofficially' tied in with a certain fund group - e.g. Blackrock etc - because they have some sort of business understanding with them - it is this bit I really don't get.

BlackRock can take the IFA to the Royal Box at Wimbledon every year and send the CEO to personally massage the IFA's feet for the duration of the singles final (although this kind of inducement would be severely frowned upon by the FCA), but the IFA would still have a statutory duty to consider all other providers as well as BlackRock.

Blatant inducements of this kind are effectively banned, but providers will still do their best to get in IFAs' good books with free seminars and the like.

But if you are the kind of person who is more interested in freebies from providers than picking the best solution for clients, it's increasingly unlikely that you'd cling on to the IFA label. Most people with this mentality would give up the pretense and go join SJP. Or the unregulated underbelly.

bostonerimus

Personal finance is often made unnecessarily complicated and obscure. If you feel you need someone to help make sure they give you value for money and I would see if you can employ them on a "one off basis". Try to avoid paying someone an annual fee to "manage" your portfolio as for 99% of people a well constructed financial plan should be easy to self manage.

What do you need and how much do you have to invest and manage? For anyone the first bit of advice should be to do a detailed budget so you can manage spending, but I rarely see that advice given.

reeac

A very useful thread. A related aspect is the varied roles of "platforms". We use HL to do the clerical work such as record keeping and reporting, bed and ISA ing and dividend reinvesting but not to advise us. Are those typical platforming activities offered also by IFAs?