Adviser outsourcing is like hiring a personal chef. You could do it yourself, but it probably would not be as good a result, and not doing so frees up time to focus on other things. Passing some responsibilities on to a discretionary fund manager (DFM) is similar — the adviser could manage the investments, but a DFM likely has more specialised knowledge and will ideally produce better results.
Two types of DFMs exist. The first is best suited to wealthy clients who are looking for a manager to develop a bespoke portfolio suited specifically to their needs. But this customised investment scheme comes at a cost — in the form of higher management fees than usual and hefty minimum investments.
The second is an investment outsourcing option for advisers. These DFMs offer model portfolios that are often classified by their risk rating or how heavily they invest in different asset classes. The increased use of DFMs by advisers has been questioned since the introduction of the RDR, which aimed to approve transparency and cost structuring across the financial services industry.
Since the RDR, outsourcing has become a more popular solution, freeing up advisers’ time to focus on financial planning and to potentially take on more clients. This will become more important as the impact of the pension freedoms continue to be felt and the advice gap widens. Anything that alleviates time pressure on advisers is usually looked at favourably.
There has been an abundance of warnings regarding the looming advice gap. Since chancellor George Osborne allowed pensioners to take their savings as a lump sum, there are endless opportunities for what this section of the population can do with their money. While the government has guaranteed that every person taking out their savings will receive guidance about what they could do, there has been widespread criticism that the guidance offered is too basic and that more professional help will be needed. Research from Aegon recently found that three quarters of people do not know the difference between professional regulated advice and guidance.
Trust a robot?
The pension freedoms are likely to increase the burden on advisers’ already busy schedules. This has led to a proliferation of automated advice services, or “robo-advice”. Technology has filtered into all aspects of modern life, but many may not feel comfortable trusting an algorithm with their retirement savings. While it could be argued that it does have a place in the financial advice market, particularly to improve efficiency, it may not be an overall solution that many consumers would be happy with. DFMs offer an outsourcing option to advisers, but in human form as opposed to a robot.
