6. Discretionary and Advisory Management Flashcards
A. Investment management services (pages 2, 3 & 4)
These fall into one of three different types of solution:
- Bespoke segregated portfolios (tailored to the individual client and can be operated on a discretionary or advisory basis)
- Managed portfolios (structured to a particular risk profile and targeted at that element of clients. All of those clients receive the same portfolio)
- Fund portfolios (a portfolio of preferred UTs/OEICs or multi-manager funds)
A. Investment management services (pages 2 & 3) - BESPOKE PORTFOLIO MANAGEMENT
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- this is the traditional service offered by stockbroker and private client investment managers
- model portfolios are used, but with some flexibility
- minimum entry level is usually £250,000
DISCRETIONARY INVESTMENT MANAGEMENT (DIM)
- manager makes all decisions
- because client has given them discretion to do so
- decisions made within constraints of client’s needs, objectives and the startegy agreed with them
ADVISORY MANAGEMENT (AM)
- for clients who want to retain an element of decision making
- manager explains what decisions they want to make and why and the client decides whether to carry them out or not
- AM may be more expensive
- AM portfolios may drift away from the chosen model if the client doesn’t agree to changes
- DIM switches may take place before AM switches due to having to wait for a client’s permission
- AM clients may have switches undertaken at different times so some may benefit more than other based on market timing
- using a benchmark as a comparison against an AM portfolio is problematic so often agreed as information only
A. Investment management services (pages 3 & 4) - MANAGED PORTFOLIOS
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- standardised portfolios designed around a range of risk profiles
- can be assigned to a client’s risk level
- clients in a particular portfolio receive the same investments and changes are made at the same time
- lower entry levels of £20,000 (low are £1,000)
A. Investment management services (page 4) - REGULATORY PERSPECTIVE
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When selecting and investment management service or product, advisors must ensure they meet the rules of the FCA on conflicts of interest or inducements:
- FCA does not expect to see payments being channelled to a particular provider
- providers should not be chosen because of benefits gained by the relationship between the parties
A1. Investment management styles (pages 4 & 5)
Two main investment management styles:
TOP-DOWN APPROACH (ongoing and dynamic)
- Has three stages:
1. Asset allocation
2. Sector selection
3. Stock selection
BOTTOM-UP APPROACH (attractions of single shares)
- Three most used styles:
1. Value (analysis can identify businesses whose value is greater than their market price)
2. Growth At A Reasonable Price - finding companies with long-term sustainable advantages in terms of quality of management and technology (where it is worth paying a premium for businesses that have premium characteristics - used by active fund managers)
3. Momentum (where the belief is that large increases in price of a security will be followed by large gains - so it is essentially investing where others do)
A1. Investment management styles (page 5)
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Also important to know whether the manager is using their fund house’s investment style or not:
- Centralised Approach: firm/fund house has an agreed investment policy that all managers follow
- Decentralised Approach: firm allows managers to operate freely but within general constraints
A2. Regulatory perspective (page 5, 6 & 7)
FCA has issued guidance on how firm’s are expected to meet their regulatory requirements:
‘Assessing suitability: Replacement business and centralised investment propositions’
The FCA considers CIPs to include standarised approaches to providing investment advice:
- Portfolio advice services (using model portfolios to meet the investment requirements for different risk levels of client)
- Discretionary investment management (either in-house or outsourced, where the adviser has some input in the investment strategy)
- Distributor influenced funds (DIFs) - (typically structured as OEICs. The distributor (usually the advisor firm) has some control over fund design and management
A2. Regulatory perspective (page 6)
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GOOD PRACTISE EXAMPLES:
- preferred fund panel for transactional clients
- suite of low-cost funds for low-value clients
- MPS for higher-value clients
- DFM for those requiring bespoke service
BAD PRACTISE EXAMPLES:
- acquired client banks not looked it enough to work out whether the CIP remained appropriate
- where a single CIP was given to all clients and the adviser had not thought about whether it was actually suitable for all clients
A2. Regulatory perspective (pages 6 & 7)
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DESIGN & DUE DILIGENCE OF A NEW CIP:
- decision to offer a CIP should take into consideration the need/objectives of target clients
CLIENT SEGMENTATION:
- using a wide range of CIPs for larger client banks
- segmenting them into groups and several CIPs
USING 3RD PART SOLUTIONS:
- suitable due diligence should be considered when looking to use a 3rd party solution, such as:
- charges
- financial standing
- tax wrappers available - when outsourcing, both parties must ensure the personal recommendation is suitable for the client
PORTFOLIO CONSTRUCTION:
- firms creating their own portfolios must ensure they align with the risk output of any risk profiling tool used
- where asset allocation is used to build portfolios a process needs to be in place to reduce portfolio drift
INDIVIDUAL SUITABILITY:
- recommendations must remain suitable for individuals
COMPETENCE:
- advisor should be able to identify when a CIP is not suitable for a client (and recommended an alternative)
- firm needs to ensure that it’s advisors understand the CIP and are competent
B. Operating features (page 7)
B1. Client agreements (pages 7 & 8)
It is a regulary requirement that a formal two-way agreement is entered into.
Purpose of the client agreement is to set out the rights and obligations of the parties and other terms on which the firm will provide services to the client.
It is appropriate to enter into a formal agreement when undertaking discretionary investment management for a client:
- firm requires authority from the client to be able to manage the portfolio on their behalf
- client needs an agreement in place to confirm that the assets remain legally theirs
- any changes to a client agreement must be made announced to clients 30 days before they are made
- agreements must be retained for the duration of the relationship
B2. Client assets (pages 8 & 9)
Rules relating to custody and safeguarding client assets are contained in FCA Handbook Client Assets Sourcebook (CASS).
CASS requires firms holding clients assets to:
- make adequate arrangements to safeguard clients’ownership rights
- prevent the use of safe custody assets belonging to a client on the firm’s own account
- minimise loss by introducing organisation arrangements
B2. Client assets (pages 8 & 9)
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Nominee Account:
- set up to hold client’s investments
- either the firm or a custodian operates this account
Nominee Company established to own the account:
- nominee’s name along with account number appear on records of ownership of CREST certificates
Client’s investments held through:
- omnibus nomiee account (all investments in one account)
- designated nominee account
B3. Legal entity identifier (page 9)
Firms subject to transaction reporting obligations are not able to execute a trade on behalf of a client who is eligible for but does not have an LEI.
Enables LEI-given entities who make a trade to be identified in any juristiction.
B4. Client orders and record keeping (pages 9 & 10)
- Detailed records must be kept after receiving a client order or making a decision to deal
- these must be made available to regulators on request
- extensive records must also be kept for the processing of orders to allow a trade to be tracked through
C. Reporting requirements (page 10)
Reporting the performance of investments to a client is a key part of the DIM service.
C1. Regulatory requirements (page 10)
Types of report and fequency split into two categories:
- Occasional reporting (contract notes)
- Periodic reporting (regular review reports)
C1A. Occasional reporting (pages 10 & 11)
When trades are carried out for a client, details of the transactions are sent to the client in the form of a contract note.
- contract notes need to be issued as soon as possible
- and no later than the business day following execution
- trades executed after close of business are treated as being executed the following day
- for trades split into tranches a single contract note can be issued with prices averaged
C1B. Periodic reporting (pages 11 & 12)
These are regular reports covering such things as:
- valuations
- performance reports
- transaction reports
- capital cash statements
- income statement
Periodic reports must be issued at least every six months except where:
- the client requests them to be issued quarterly
- a leverage portfolio is provided, in which case they must be issued monthly
C1B. Periodic reporting (page 12) - INVESTMENT VALUATIONS
These must be provided on a regular basis and include information on:
- holdings
- valuation
- analysis (performance against benchmark)
The values should be undertaken using a reputable source which should be reviewed frequently.
