When it comes to assessing and monitoring potential and current managed portfolio service providers, smaller firms are feeling the crunch more acutely.
Those are the findings from a new piece of research from Quilter Cheviot and NextWealth, where they polled 200 financial advice professionals to analyse the views of the community on managed portfolio service (MPS) due diligence.
The research found that 26% of advice firms have no set timeframe for reviewing investment partners. However, smaller firms are experiencing time and resource constraints more than their larger peers.
When asked what the three largest challenges adviser firms face in conducting thorough due diligence on outsourced investment partners, for single adviser firms, 30% listed time constraints, while 28% listed the cost of the exercise. For 2-5 adviser firms, 32% said time constraints and 23% cited the cost. For firms with 6-10 advisers time constraints was only selected by 15%, while the cost of carrying out due diligence exercises was chosen by 18%.
As a result, the findings also discovered that larger firms were more likely to have a defined process for monitoring investment firms after their selection. 65% of single adviser firms do not have a defined process in place, while 37% of 2-5 adviser firms are in that position. By contrast, 85% of 6-10 adviser businesses and 86% of firms with more than 10 advisers have established a partner monitoring process.
The survey also reveals that larger firms are most likely to have started working with a new partner in the last 18 months and they are also those least likely to have stopped a partnership.
Among the reasons cited by smaller firms for not switching investment provider was the prospect of adding even more time to the process if changes were required, for example fund switches and transfers. Indeed, one adviser from a three-adviser firm stated in qualitative interviews for the research “Why create more friction, when you know how to deal with the frictions you already have?”
David Butler, head of business development at Quilter Cheviot, commented: “Due diligence can be an arduous exercise, but it may also be one of the best investments you can make for a client. Clearly the market environment just now means advisers, and especially smaller firms, are being constantly squeezed from a time and resource perspective, so it is understandable if they cannot dedicate the resource they would like to the exercise.
“However, it is vitally important that advisers have trusted investment partners and that you can explain your decision making for choosing one provider over another to a client. While it can be laborious, the more you do it, the quicker it should become as processes and data gathering become embedded in how you operate.
“Equally, there is a lot of help out there for advisers, with more and more firms launching aiming to help ease that burden for advisers. It is important that advisers also ask providers to help ease the burden. If a managed portfolio provider does not have easily accessible and digestible due diligence documents, then questions need to be asked about how they would provide the adequate information on a client’s portfolio.”
Julie Best, Insight Director at NextWealth added: “This guide is designed to appeal to firms of all shapes and sizes, recognising the particular pressures on resource and time that advisers face. It comes as no surprise to us that smaller advice firms are the most stretched of all, so this practical guide should be particularly useful, arming them with the tools, checklists and information to strengthen their approaches around this increasingly important aspect of their advice proposition.”
