Gaps in DFM market won’t last long

Psychologists sometimes say long love affairs have two phases, initial volatility and subsequent peace – or at least something short of outright conflict.

Advisers’ love-in with discretionary fund managers (DFMs) is definitely at the first stage at the moment. Yet last week I discussed the possibility that the volatility could give way to a tiff – if an adviser outsources their clients’ investments to a DFM, and the DFM’s advisory arm poaches the clients from the adviser.

Last week I was chatting to a director at a well known wealth manager who was thinking of setting up his own DFM – without an advisory arm. He asked me whether I thought there was a gap for a standalone DFM in the marketplace. My initial instinct was to say there were an enormous number of DFMs already, so anyone looking to grab business from financial advisers would face notable competition, particularly on advisers’ investment platforms. Nevertheless, if the director had built strong relationships with certain clients or advisers who were likely to follow him to his new firm, then he would have the makings of a business.

Given a little more thought, however, I might have been understating the chances of experienced operators like the director I was speaking to. First, DFMs as a whole have done less than other fund managers to publicise their individual performance for their clients, their capabilities or the distinctive features of their approach to investment.

Admittedly, data on performance in the industry as a whole, or of broadly representative portfolios, is publicly available from the Association of Private Client Investment Managers and Stockbrokers (Apcims) and research firm Asset Risk Consultants (ARC). IFAs and DFMs can also pay to get hold of more detailed information, or obtain it from platforms.

However, there is no direct equivalent of the IMA or AIC sectors, which remain key benchmarks in the retail market. Without talking more openly about performance, individual providers cannot have a public conversation about the process they use to achieve their returns. Although some investment managers have been faster to address this than others, in terms of transparency, there are still gaps.

Second, DFMs who wish to remain standalone entities – that is, never offer financial advice – could make headway by becoming much more vocal about it. In extreme circumstances, a DFM could even sign agreements with advisers that include non-compete clauses. The reason is that advisers will be much better disposed to dealing with a DFM if they do not feel the DFM is about to poach their client. This might of course provoke the FSA – or its successor, the Financial Conduct Authority (FCA) – to muscle in and say that advisers should not be restricting clients’ options in their own interests. But the adviser could also retort that building a relationship with a single adviser is likely to improve outcomes for the customers.