Advisers who outsource investment decisions to discretionary fund managers (DFMs) could be exposing their clients to an unreasonable level of risk, according to a number of high-profile IFAs.

Andrew Alexander, head of investment and product strategy at Campbell Thomson IFA, claims DFMs can have a drastically different definition of risk to advisers, meaning investors who believe they have a cautiously positioned portfolio are often over exposed to equities. 

"What they [DFMs] view as cautious low-risk is completely out of sync with what advisers view as risk," he said.

Alexander says his view of a cautious portfolio, for example, would be comprised of 20 to 25 per cent equities, making it suitable for the IMA’s 0-35% Shares sector. 

However, after recently speaking with a selection of DFMs about a cautious proposition, many providers came back with portfolios that had 60 per cent in equities – 40 per cent of which were listed in the UK. 

Additionally, he pointed out that risk-profiling tools were tailored towards an IFA’s definition of risk, and warned that if an adviser approached a DFM looking for a cautious to moderate portfolio, they could end up with extremely high levels in equities, which would be unsuitable for low-risk clients. 

"More and more I’m getting the view that what DFMs are recommending is not suitable for our IFA level of risk, and further, our clients’ level of risk. If you fail at the first step then everything else is going to be out of kilter," he continued. 

Alexander also hit out at the lack of availability of past performance data for DFMs and says he would be inclined to use multi-manager funds, which have a solid performance history. 

Martin Bamford (pictured), chartered financial planner at Informed Choice, is of a similar opinion. He says DFMs are often "two or three levels up the risk spectrum from IFAs" and warns that advisers looking to outsource their investment decisions need to be in control of both the assessment and population of a client’s portfolio. 

Bamford agrees that risk-profiling could result in a client being put into an unsuitable DFM portfolio, but says he wouldn’t expect competent IFAs to take such a simplistic approach as selecting a risk number. 

Nicholas Holdcroft, director at Horlock Holdcroft Financial Consultants, says the discrepancy is not an issue as long as advisers clearly communicate their clients’ investment objectives and regularly review portfolios. 

"We sit quite well on top of DFMs to make sure they’re building a portfolio that reflects [the client’s objectives]," he commented. 

"As long as reviews are kept up, the portfolio shouldn’t shift to something we didn’t expect to be there."