The latest research by Asset Risk Consultants is an indictment on the value of discretionary fund managers (DFMs).
According to the report, during the past three years the majority of private client discretionary portfolios have failed to match the risk-adjusted returns available from a simple passive strategy. And they didn’t fare any better over a longer timescale.
In the run up to the RDR, advisers got sold the idea that DFMs can do a better job than advisers. Advisers are being told that when it comes to choosing investments and building portfolios, a DFM is the expert. What this report shows is something to the counter. Not only are DFMs not doing a much better job, it seems many of them actually do worse.
While I question ARC’s methodology, particularly the use of a mix of cash and a global equity index as its benchmark, the report does suggest that only a tiny proportion of DFMs systematically add value.
If DFMs do so badly when compared to a simple passive strategy, how much worse will they fare with a sound evidence-based portfolio, for instance one that captures size and value effect on equities?
This is a challenge for advisers. Can you show any evidence that the additional layer of cost as a result of using a DFM is justified? In the end, the regulatory onus is on the adviser, not the DFM, to justify the additional charges.
Abraham Okusanya is principal at FinalytiQ
