Wealth management: Discretion - the model of choice

Increasingly, solicitors may find themselves concerned with investment portfolios, either as trusted adviser to the owner of the assets or as trustee (as an individual or through a corporate trustee company) of a trust with an investment portfolio.

It may be that they have neither the time nor expertise to make investment decisions, yet in their capacity as adviser or trustee may be held responsible for performance of investment portfolios. Performance in this context refers not simply to investment performance but can cover such areas as portfolio risk, income generation and balancing the requirements of the parties with an interest in a trust.

Volatile markets, the proliferation of asset classes and methods of accessing them, combined with a heightened awareness of risk and the FSA’s requirement for close alignment of portfolios with the ultimate clients’ specific objectives, mean that professional investment management of the portfolios is now essential. Furthermore, the traditional “advisory” model, whereby the broker makes a suggestion on investment strategy and stock selection but the ultimate decision rests with the client, carries very significant risk for trustees and advisers who do not have clear investment expertise.

It is for this reason that discretionary investment management – where the investment manager makes all investment decisions within prescribed parameters and reports to the trustees or client – is increasingly the model of choice for private individuals and trusts.

From the outset, the discretionary investment manager takes responsibility for ascertaining the trust or client’s investment objectives and risk tolerance, thereby reducing risk for the trustee or adviser. On a day-to-day basis the manager ensures ongoing alignment with these specified investment objectives through review of strategy and investments.

This in no way reduces the adviser’s or trustee’s role. Through regular reporting, the provision of up-to-date portfolio information online and, of course, direct communication with the manager, the lawyer is in an excellent position to be able to integrate investment into the overall advice that he is providing to the client, or to fulfil his or her duties as trustee without taking responsibility for investment matters.

As a result, in choosing a discretionary fund manager, it is worth ascertaining service levels such as meeting schedules, reporting information and online access, as well as looking closely at the manager’s investment performance record through a variety of economic and market conditions and understanding what has driven that performance. Costs are clearly also a factor, and making an estimate of the overall cost of management rather than concentrating on headline fees is important, always bearing in mind that service excellence, access to the manager and investment performance can far outweigh differences in fees and charges. Most importantly, an assessment of the experience and competence of the manager who will be taking responsibility for the portfolio is essential.

On an ongoing basis, performance against the agreed benchmark as well as evidence of focus on the particular requirements of the portfolio is central to making an assessment of whether the investment manager is fulfilling expectations. However, it is worth remembering that investment in risky assets should only be undertaken with a long term view, and the chosen manager will certainly be investing with this in mind. Changing managers on the basis of short term investment performance is likely to result in that performance becoming embedded and at considerable expense.

In conclusion, use of a discretionary investment manager to take responsibility for client or trust assets can cement the lawyer’s position as overarching adviser to the client, while removing very significant risk from the role.