The value of a flexible DFM

This is a tangible consequence of the RDR, and the impact of the legislation on advisers and their outsourcing partners.

The RDR has accelerated the take-up of DFM services as financial advisers juggle with greater client responsibilities, as well as new demands from regulators and other industry stakeholders.

From regular communication with intermediaries, it is clear that outsourcing to a DFM provider also allows financial advisers to focus on wider financial planning, in particular pension and inheritance tax planning. In addition, they also have more time to focus on client service and communication, managing new client opportunities and expanding the services they provide.

But what do we mean by flexibility? That each adviser tends to run their business differently from others; that no two of their clients are the same; and that the RDR has placed significant reporting and compliance demands on advisers that DFMs can help fulfil.

DFMs that take a ‘one size fits all’ approach to working with advisers ignore the often complex and varied requirements of the adviser’s clients, many of whom are only properly exposed through the suitable advice provided.

It may be that the DFM business always required a degree of flexibility and a bespoke approach in its workings with financial advisers, but this has amplified over the past 18 months. Advisers and other intermediaries remain focused on serving clients and delivering suitable advice while maximising the commercial impact of their business, and this has led to developments such as new business models.

Recent research commissioned by Investec Wealth & Investment has shown how important the need to be flexible has become. It found that under their existing DFM relationships, 97 per cent of financial advisers insist on remaining responsible for assessing the overall suitability for each client based on their tolerance to risk and capacity for loss.

However, 66 per cent reported that they take overall responsibility for agreeing the client’s investment strategy, suggesting that in most cases, a DFM’s mandate may cover only part of their client’s overall portfolio. Furthermore, 17 per cent said they also remain responsible for asset allocation decisions, implying that for certain clients, advisers retain a high degree of involvement in the investment management process while working closely with a DFM.

The research also found that advisers are embracing a variety of structures to underpin their DFM working relationship and often employ more than one, depending on the DFM.

This study shows that the needs of advisers and their clients are far from homogeneous and DFMs have to be flexible if they are to develop successful partnerships and deliver the quality service and performance that advisers and their clients demand.

The rise of adviser outsourcing has led to a plethora of adviser proposition launches. But the needs of advisers and their clients are far from standard, and successful DFMs have adopted flexible approaches as a means of developing successful partnerships.

It can be seen that the RDR was a tipping point in the use of DFMs, as intermediaries face the challenges of maintaining the size and quality of their client base in a new environment. Indeed, there is greater recognition of the specialist skills that DFMs provide to intermediaries – acknowledging that a strong partnership with a DFM adds real value to the client relationship and enables them to focus more time on their clients.

Mark Stevens is head of intermediary services at Investec Wealth & Investment