GOING DFM? READ THIS BEFORE TAKING THE LEAP

If you run a centralised investment proposition (CIP), you may be thinking about expanding your services to become a discretionary fund manager (DFM).

In many respects, there is no better time to become a DFM. More than ever, people are seeking reliable, trusted, experienced professionals to guide their assets through what is undoubtedly challenging economic times.

Becoming a DFM may also make your own practice more efficient, because it can be faster and easier to switch within a discretionary mandate. If you operate an active CIP this can be important. Clients should see the benefit if you are able to steer their portfolios skilfully and rapidly through the turbulent markets of today.

If it was that easy, however, everyone would be doing it! The responsibility of being a DFM is huge and there are, quite rightly, many important compliance requirements you need to fulfil to make a positive start.

Before you decide if transitioning to a DFM is the right choice for you, we’ve outlined the five key things you should consider:

1. Philosophy and procedures: To qualify as a DFM, your firm must have a least two competent individuals who hold the relevant qualifications for discretionary management. At least one of these should always be available during office hours, so you aren’t left without someone to trade. Before you decide to ‘go DFM’ you’ll also need a clear investment philosophy that is documented professionally and accurately.
2. ICARA and MIFIDPRU disclosures: The Internal Capital Adequacy and Risk Assessment (ICARA) is an evaluation of the key risks within your business model, to establish if additional capital and liquid assets, above the minimum requirement, are needed to mitigate the firm’s most material harms. This ‘live’ document and process will feed into your risk framework and must be reviewed and updated at least annually. You also need to publish the results on your website. The level of detail should be proportionate to the type of firm you run – an SNI or non-SNI.It is worth remembering the ICARA should be challenged by someone independent, usually your auditor or compliance consultant. To keep you on your toes, the FCA will undertake supervisory reviews and evaluations to ensure compliance with the MIFIDPRU rules.
3. Client reporting: Periodic reporting for discretionary managed portfolios has been around for a while. Put simply, clients need to know what you are doing with their investments.
4. Pricing and service proposition: You need to consider carefully how you are going to price your service. Firms already offering a CIP on an advisory basis often look to provide discretionary management without increasing their ongoing fees. If you are planning to charge more, you’ll need to ensure the new offering is sufficiently enhanced from your existing advisory model to warrant the additional cost.
5. It’s an investment for you too: Becoming a DFM requires a commitment of time and money at the outset, which in reality, isn’t likely to be recouped for a number of years. You should view the journey to qualification as an investment in your business. Don’t simply expect to pass all the costs onto your clients.

If you are thinking about becoming a DFM and would like more information, or the help of an experienced professional to guide you through the process, don’t hesitate to contact us on (0161) 521 8641 or email: info@b-compliant.co.uk