Using multiple DFMs

New thread from a discussion elsewhere:

Basically, what is wrong/right/good/bad about using more than one DFM for the same client?

If you do it, how to you justify it?

@arongunningham had this point:

The issue that was raised, kind of unique, was a SIPP managed by 2 DFMs on a near 50:50 basis.

@Nathan mentioned stock overlap.

I added the following comments:

it isn't just stock overlap.

Given that we are looking at a SIPP, imagine that both DFMs are managing to broadly the same mandate of risk, term and objective. As a simplified example:

There are 4 stocks in a sector that can be used. DFM A holds two, DFM B holds the other two. The SIPP therefore holds all four. Now, imagine that the research analysts at each DFM think that the two stocks they don't hold offer greater potential for meeting the objective. So DFM A sells his two and buys the other two and DFM B does the same.

Outcome - client still holds all four stocks but has incurred trading costs and time out of the market.

Benjamin Fabi FPFS
Chartered Financial Planner

http://twitter.com/benjaminfabi 

Comments

  • Personally I'd stay away from this for the reasons Nathan already mentioned, but also the fact that you're effectively blending two different propositions with their own approach to risk, objective, style of investing e.t.c. Would be a nightmare trying to assess the risk for the client if you blend, especially if each uses tactical asset allocations as could lead to massive skews within the overall asset allocation.

    Also having more DFMs or funds doesn't automatically increase diversification benefits, in some cases they'll actually reduce the diversification ratio due to correlating assets.

    Might be ok if the client has different pots with different objectives/time horizons however but this is nothing I've really thought about doing before!

  • T_SmithT_Smith Member

    Also can make the CGT calcs a headache if the portfolios are held outside a wrapper due to potential bed & breakfasting (bearing in mind Nathan's comment in the first post.

Sign In or Register to comment.