Increasing numbers of offshore advisers are moving away from the initial commission model towards an on-going service model.
This has partly been driven by regulation, such as Mifid II, but also by the realisation that an on-going service model can add significantly to the value of advice businesses, which are typically valued as a multiple of trail.
In a previous article, I wrote about the benefits of discretionary model portfolios for advisers and how outsourcing the investment to a professional helps to ensure that the risk appetite of the client is met and monitored.
But while this is beneficial for the client, it can leave the adviser with a challenge when it comes to client review meetings.
What to talk about?
Pre-DFMs, client meetings would typically involve discussions around fund selection and changes to investments and strategy.
With that now outsourced, advisers need to find another focus for the review meetings to demonstrate to the client why and how they are earning their fee.
Our experience in the UK is that advisers are concerned that clients see more value in the DFM than the service provided by the adviser.
Quality control
Ultimately, the job of the adviser is to make sure that the DFM is doing what it says it will.
The adviser still adds significant value to the relationship by ensuring that the portfolio is performing the way it should. In other words, is a cautious portfolio actually behaving like a cautious portfolio?
At a very basic level, this could simply be a review of the client valuation. However, in a lot of cases, it is much more complex.
Revolving money
Clients can put money in and take it out on a regular basis and this can make valuations very complicated.
If you just take the client valuation at face value, it can give a very inaccurate impression of the portfolio performance. An example I looked at recently had a starting value of around £173,000 and a closing value of just over £174,000 ($233,000, €197,200).
On the face of it, the portfolio had gained just 0.5% and even in these days of low returns this is not a very impressive figure. However, in this case, the client had been taking out £3,000 per month. So, in reality, the portfolio had gained around 6% on an annualised basis.
The ability for advisers to quickly and easily carry out this analysis – in effect a money-weighted return – is a vital part of the review process. It allows them to ensure that the portfolio is meeting the clients’ needs.
And if it is not, the adviser can act quickly and do something about it.
