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Advice industry needs to address DFM due diligence now, warns Nucleus


Advisor-built wrap platform Nucleus is warning that advisers need to have structured due diligence in place when choosing to outsource to a discretionary fund manager – or risk damaging their entire business.

The warning comes to highlight this increasingly regulated sector to advisers and for them to ensure they are equipped with the right due diligence questions to ask discretionary fund managers (DFMs).
Following the Retail Distribution Review, more and more advisers are choosing to use third parties to manage client investment strategies and a survey conducted by Defaqto* revealed that 43 per cent of advisers are now outsourcing their investment proposition, of which 72 per cent are opting to use DFMs.
And with the wide variety of investment propositions currently available on the market, the FCA has made its expectations clear of advisers active in this area.
To address the knowledge gap, Nucleus has published the latest in its series of leading industry white papers: ‘DFM due diligence: the questions to ask’. The 16-page white paper highlights the key legislation, the process advisers should consider when choosing to outsource their investment strategy in this complex area and the due diligence questions to be asked to ensure best possible client outcomes.
Nucleus’ white paper also highlights how the use of DFM services through a platform using model portfolios are on the increase. The wrap platform currently offers a range of 49 DFMs for selection on its platform and since 1 January 2014, there has been a massive 333.81 per cent growth in volume of assets under administration (AUA) held in discretionary portfolios.

Barry Neilson (pictured), Nucleus business development director, says: “Given the huge number of investment propositions available on the market, a big challenge for advisers is how to select the most appropriate solution for their clients whilst also dealing with their lifestyle aims, tax planning and overall investment strategy. Our white paper focuses on the areas we are hearing being discussed across our adviser audience including the regulatory back drop surrounding the use of centralised investment propositions (CIPs) in particular and raises the core questions to be asked of DFMs in areas including charges, performance and service.

“With the increasing activity in this area, the FCA will no doubt continue to review its regulation as the market grows. Therefore it’s critical advisers carry out due diligence when choosing to outsource their investment strategies, otherwise there is a real risk of damage not just to their reputations but to their entire business too. Our white paper offers advisers the right guidance to ensure the best outcomes for their clients.”

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