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DFM use may have peaked, MM research suggests

Cost still main drawback of DFM services, range of choice in market also creating problems

By Laura Suter | Published Aug 09, 2012 | comments

Costs for using DFM services is the main drawback for advisers, although two-thirds have seen their use increase in the past three years, Money Management research can reveal.

A survey of the advisory community found while DFM use has been on the up, more than half of advisers do not expect it to increase further ahead of the RDR.

The FSA recently warned advisers about using on centralised investment proposition, for fear that clients will be shoe-horned into a product or service. The research shows this could be a real concern, as 40% of those that use DFM services only do so with one firm, while a quarter use just two.

When selecting a firm, 20% of the 161 respondents said the range of options on offer from the DFM is the most important factor, while 19% said that they want a DFM independent from an investment house.

Performance, cost and service levels each got around 15% of advisers stating that they were the most important selection criteria.

The minimum investment advisers would put with a DFM is also at odds with what most bespoke services offer, with a third of advisers saying that £100,000-£150,000 is the lowest client investment they would place with a service. However, many DFMs have a lower limit of £200,000-£250,000 for their truly bespoke investment management services.

More than a third of advisers would use DFMs for clients with less than £100,000 to invest, despite common convention meaning the charges on the services outprice these individuals.

When discussing the drawbacks of DFMs, the loss of control was ranked as the main concern by 30% of providers, while 18% said that the difficulty in researching a firm was the biggest issue.

Among proponents of DFM services, model portfolios are used the most frequently for clients where DFMs are not appropriate, with just 17% using risk-rated portfolios. This is despite many tipping risk-rated models as the next growth sector for outsourced investors.

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