Investments 

Is outsourcing worth it?

Research from wealth management firm Heartwood shows 43 per cent of IFAs already outsource the management of their clients’ investments, with a further 13 per cent of advisers planning to do so in the near future.

But when it comes to selecting a DFM, it is a firm’s track record that advisers are most concerned about. Heartwood’s research shows that 90 per cent of advisers claim the track record of a DFM firm is “vital”, followed by the assurance that their own relationship with their client would not be threatened by outsourcing.

It is the latter, however, that is still weighing on advisers’ minds when it comes to outsourcing to a DFM. When asked what has dissuaded them from outsourcing any of their client portfolios to a DFM, 72 per cent cited a lack of control over the investment process and 68 per cent were unwilling to delegate responsibility to a third party.

Defaqto’s insight analyst for funds Fraser Donaldson explains: “When looking to outsource to a DFM advisers need to treat the partnership as a long-term business relationship - robust due diligence is therefore critically important. However, the DFM space, both bespoke and as a model portfolio service, is crowded, and propositions vary widely. As a result, it is understandably difficult for advisers to evaluate which solution will best suit their business and client base.

“Equally, there is an inherent challenge for DFMs – how can they differentiate themselves within the marketplace and appeal to advisory businesses during this window of opportunity? [To take an example,] our Star Ratings assess DFMs across a wide range of aspects to provide an independent verification of what a proposition offers. To achieve the highest level of rating, propositions will need to demonstrate a high degree of dedication to the intermediated market, flexibility, transparency, and high levels of personal and online service.”

But Andrew Whiteley, partner at insourcing proponent Assetfirst, argues that outsourcing a client’s portfolio can be very costly. He says: “There is no doubt that use of model portfolio services can streamline an adviser’s business processes, driving efficiencies into a business while also decreasing its risk. Risk-rated model portfolios can deliver the risk profile most suitable for the individual client and can be rebalanced automatically on a regular basis to keep up-to-date with market movements.

“However, what advisers need to consider carefully if they outsource their client’s portfolios to a third party is the cost involved and the control they are giving up in the process.

Outsourcing bull

Bart Dalton, independent financial planner at Taurus Wealth

I think it’s a good thing, because for us the client relationship is the most important part - that’s where we add value. We believe that it’s about figuring out how a client’s investments match up with their goals.

On the fence

Patrick Connolly, certified financial planner at AWD Chase de Vere

Many advisers don’t have the time and resources to effectively research investment funds and construct and monitor client portfolios. For these advisers DFMs are a sensible option. The popularity of DFMs will continue to grow, although their benefits come at a cost, with the client paying for the underlying investment manager, the adviser and the discretionary manager, making some offerings very expensive.

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