DFMs love-in is not a win-win situation

As the RDR loomed two years ago, it seemed retail investment advisers and their wealthier clients were stuck in a quandary. The adviser knew the clients had enough money to command a more tailored service, a more personalised investment than funds of funds or multi-asset products. However, the more stringent requirements of the RDR must have meant that many advisers were wary of building that separate portfolio in-house.

At that stage, advisers knew they could get this bespoke discretionary service by outsourcing their clients’ investments to a DFM – even if the DFM was unavailable on their favourite investment platform(s). All they had to do was write a reference and send the client off to the DFM directly. The DFM might have its own advisory arm and might attempt to poach the client. But if it valued the introductions it received from the IFA, it would probably leave them alone.

As the costs of implementing the RDR became clear, advisers had an even bigger incentive to court wealthier clients, as they were more likely to pay for a most expensive RDR-ready service. However, advisers were still nervous about outsourcing their clients to DFMs.

Advisers’ investment platforms effectively brokered a compromise agreement between advisers and DFMs: the platform would host the DFM service online, advisers would put clients into it directly and there would be no need for clients to visit the DFM in person. DFMs and platforms would hoover up assets on the cheap, and advisers would obtain a worthy, RDR-ready service for their clients.

However, the FSA has confirmed there is a snag to this arrangement. The client must still know who their DFM is, and the DFM on the platform must still be able to identify who their clients are. As Skandia Investment Solutions, the UK’s biggest adviser platform, has pointed out, there must be a contractual arrangement between the two. DFMs are offering a tailored service, even if this is just five separate portfolios targeting risks on a scale of one to five.

The question must surely arise: tailored for whom? Especially if a client’s adviser ceases trading, or the client no longer wishes to work with them, the client and the DFM need to be able to work together through the inevitable interim period.

Some DFMs seem to be operating with the understanding that they don’t have to know who their clients are. Advisers can, by definition, advise their client to sign up with a DFM, but it is the client who must do the signing. This doesn’t leave advisers or DFMs in a win-win situation: clients will be more aware of who their DFM is, and DFMs will have to do more to service clients they hoover in off platforms. The biggest losers may be DFMs with advisory arms, as advisers may be wary of recommending a competitor, although DFMs without advisory arms may gain from the arrangement. If nothing else, the situation proves one thing: where the RDR is concerned, there’s never a free lunch.