International advisers are following the trend of domestic markets and looking to outsource the investment management component of financial advice to a third-party wealth manager, either through a fund or discretionary solution.
The cross-border international market represents a material departure from the established world of domestic DFM/adviser relationships and there are many challenges for both to consider.
Many DFM propositions remain notably domestic in their focus. This may work for say an adviser with a UK expat client, with earnings and saving in GBP and an intention to return back to the UK.
However, most expats do not fit that model, so what is the solution? Let’s take a couple of examples to illustrate this:
Client A
An Indian national who has been working long term in Kuala Lumpur, has $400,000 (£305,059, €340,213) of savings, is currently paid in USD and envisages he will be working there for a further 10 years, if not making the move permanent.
The client’s risk profile scores a medium attitude to investment risk and would point to a balanced portfolio.
However, many of the balanced portfolios and managed funds of the advisers preferred UK managers are heavily weighted toward UK and Euro equities, whereas the adviser wants a solution that is USD and Asia focused.
Also, the client would like part of their portfolio manged by an Indian firm in addition to an Anglo-Saxon brand, and would like the investments custodied outside of India through an offshore life bond.
Client B
A young French couple, currently based in Hong Kong, but her multi-national employer will relocate them in two-five years.
With €10,000 per month regular savings, the client’s risk profile suggests a growth portfolio, however their existing home-based investments have been largely bond funds advised by their bank, and they are wary of equity investing.
The adviser wants a solution that is euro-based (not a euro share class of say a USD portfolio) and wants to present a solution that reflects that aspiration for growth, but using euro fixed income instruments with a smaller element of global equity exposure.
Traditional solutions do not work
In neither case do the traditional domestic DFM solutions work. That would leave the adviser needing to still actively manage part of the asset allocation, defeating their intention to outsource in the first place.
From the DFM’s perspective neither portfolio is of a value to support a discretely managed portfolio (if regulation allowed them to deliver it). Ideally the DFM can offer a solution that automates the asset allocation to give a bespoke feel to the solution for the adviser.
The DFM’s Dilemma: It can consider building its own solution, but that may not be efficient for the multiple custody platforms the advisers wants to work with and confusing to an adviser who wants to offer more than one DFM’s solution.
Alternatively, the DFM can consider working with CRM/risk-tool providers & custody platforms to deliver the solution. Those are big strategic calls for the DFM and custody providers to make. In the meantime, the international adviser has a client need today.
See below a list of challenges for both DFMs and financial advisers in this space:
Adviser Considerations
- International client risk rating vs domestic portfolio/ fund construction;
- Retain lead of the client relationship;
- Maximise revenue streams;
- Local regulation;
- Provider selection;
- Funds vs models; and,
- Preferred custody platform.
DFM considerations and challenges
- Retain focus on core proposition: portfolio construction and stock selection;
- Regulation – DFM, adviser and client domicile; client on-boarding;
- Fund vs DFM vs research proposition;
- Trail vs clean paying holdings;
- Overhead in managing multiple models, in multiple currencies, with multiple fee options, on multiple platforms;
- White labelling for large distributors vs own-brand; and,
- Build tech solutions or work with custody platform.
