Nearly half of IFAs keep decisions in-house, survey shows
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In focus: Outsourcing Investments
Almost half of advisers do not use DFM services and of those who choose not to, nearly 80% do not expect their use to increase ahead of RDR coming in at the end of the year.
Research by Money Management of 161 financial planners showed that 48% do not use any DFMs services for their clients, regardless of portfolio size.
Yesterday, MM reported that Cazenove predicted advisers would shun DFMs after the RDR in favour of their own model portfolios and this latest research reinforces that view.
The advisers surveyed by MM saw model portfolios as the best alternative to DFMs, with a third of this group using them. That said, almost half of those not using DFMs prefer to keep the decisions in-house, either using an internal investment professional or doing the stock selection themselves.
This is reflected in the main reason for not using DFMs being the loss of control of the client’s assets. Much has been said recently of the caution advisers need to exercise when using a DFM service for their client and ensuring that they are not seen as obsolete in the process.
Advisers fear clients will not see the value in paying the IFA if the DFM is carrying out all the investment selections. However, advocates of DFMs say that this outsourcing leaves more time for the IFA to focus on other areas of financial planning.
Oliver Wallin, investment director at Octopus, said, “The big fear for advisers is disintermediation, so if the client has a strong relationship with the DFM then they may question what the IFA is doing.”
Conventionally, advisers have either retained discretionary rights and delegated this to a DFM or the client and DFM to have a direct contractual relationship, leading to fears of the adviser being left out.
However, the recent FSA paper, ‘Assessing suitability: Replacement business and centralised investment propositions’, offered a third option, whereby the advisory firm is the client of the DFM, acting on behalf of its client. This setup would go some way to allaying the fears of clients being poached from advisers, a threat that many say is more real if the DFM firm has an advisory arm.
Nick Georgiadis, head of the DFM team at Cazenove, said, “We have a financial planning arm and we don’t hide it. But it’s business suicide if the perception of the company is that it’s stealing clients, though I’m aware of firms that have done that.”
In the research, in addition to loss of control, a third of those that do not use DFM services stated that the high cost was another offputting factor, while 18% said that selecting a DFM firm was too difficult.