Will consolidation in the DFM space continue?

So will consolidation in the DFM space continue? Brooks Macdonald chief executive Chris Macdonald says there will “unequivocally” be more consolidation in the DFM industry and this trend may even accelerate.

He says: “The reason is cost. I don’t see any slowdown in the amount of legislative change affecting the industry. The regulatory cost of running a DFM is something you cannot meet if you’re running a small amount of money. Firms can outsource their compliance function, but that does not get rid of costs.”

The firm has made acquisitions in the past, but says that growth will principally remain organic.

Mr Macdonald says: “We will look at acquisitions as and when they are there. We’re getting a lot of opportunities at the moment. Acquisitions would either add skill sets to the ones we have already or give us exposure to a region we currently don’t have exposure to.”

Mr Macdonald says that to be a successful DFM companies must have a regional footprint but still maintain a consistent offering across the group.

He adds that success in this market is about “offering a highly personalised service that is scalable”.

“Having a capable and large research function is increasingly needed,” he says. “Smaller firms may have to get that in.”

Joe Dyers, head of portfolio management at Alpha Portfolio Management, believes that there is a place for the smaller players in the DFM market which can offer a differentiated personalised service compared with much larger businesses.

Mr Dyers believes a desire for scale and vertical integration is driving consolidation in the discretionary market, but the risk is ending up with a generic and impersonal offering.

Vertem Asset Management principal John Dance agrees that size often leads to centralisation. He notes: “Centralisation removes the ability of the customer’s investment manager to deliver something truly bespoke or reflective of the client’s preference, as they are only given the flexibility to invest in an ‘off the house menu’ style.”

Also, not all smaller firms necessarily want to become much bigger. Mr Dance says: “We started our smaller firm, as it provided an opportunity to do something different and allow access to a greater universe of ideas. If we became too large, we would become constrained by our size.” He argues that by becoming larger, firms become constrained to investing only in funds or stocks with enough liquidity to support the volume of money you are investing.

Gemini Investment Management offers an outsourced sales partnership with asset managers and has DFM clients. Managing director Stuart Alexander says that discretionary managers have to have critical mass and efficiency in systems to survive.

He adds: “If you don’t invest or have the ability to deal efficiently, you will struggle. If you grow too quickly, that’s going to be the biggest challenge – scalability of your client services proposition.”

According to Mr Alexander, some discretionary managers could face difficulties because of the FCA’s move to ban DFM referral fees paid. These are paid by DFMs to advisers for introducing new clients, leaving those with this model having to change it.

He concludes that there has been and will be more consolidation in the DFM industry.

“There has been a rush to the lowest common denominator in terms of price,” he says.

“If you’re small or sub-scale, you are either bought or you retain the boutique culture and grow, as you can’t charge high prices to balance costs.”

Joanne Ellul is a freelance journalist