Advisers must take care in DFM market

Advisers may have had many uncomfortable conversations with investors over the past 10 to 15 years following market falls – and, recently, the RDR.

An increasing number of advisers have concluded that the best outcome for both themselves and their clients will be achieved through outsourcing some or all of the decisions they make about their investments.

Defaqto research has seen the numbers of advisers outsourcing investment recently nearing the 50 per cent mark. In addition to multi-manager funds, choosing discretionary fund management (DFM) as a means of outsourcing investments has become a real option for advisers. However, this has not always been the case.

The previous decade has seen multi-manager investing as the outsourcing solution of choice, with only a handful of discretionary managers proactively courting business from the retail IFA market. However, the past three years has seen a significant challenge from the discretionary market to the point where it is now almost on par with multi-manager as the preferred option, with 21 per cent using discretionary management and 26 per cent using multi-manager.

Discretionary managers have noticed the increasing trend to outsourcing investment, seen significant amounts of assets going in to multi-manager and have begun reinventing themselves to compete in this market. Three years ago, it was difficult to get information on retail discretionary management. You would rarely find an account manager that was dedicated to the IFA market, let alone a dedicated IFA broker team. This meant that advisers who may have thought about discretionary management as an option were likely to dismiss it as too difficult.

In addition, most discretionary managers were adamant that they had to retain custody of the assets. As the majority of advisers hold significant amounts of clients’ assets on platforms, which generally require custody of the assets to make the platform model work, this would automatically exclude many discretionary firms.

Attitudes in the discretionary world have certainly changed over the past couple of years. In order to be successful in the IFA market, the discretionary managers are the ones that had to make the concessions. There is no doubt it is the adviser-friendly discretionary managers, flexible enough to be hosted on platforms and products, that are attracting the most interest. As part of our research we ask advisers what discretionary managers they use, and we are seeing the popularity of newer propositions bespoke to the adviser market increasing.