Assessing the relationship between DFM and platforms

The FSA’s consultation in April 2012 and following guidance in July on Replacement Business and Centralised Investment Propositions (CIPs) also indirectly highlighted potential concerns about hosting these propositions on platforms with the regulator warning: “A firm either selling or intending to sell CIPs should ensure that it is not ‘shoe-horning’ clients into the CIP”.

Richard Mein, managing partner at Parmenion, acknowledges it can be complicated. “It is relatively straightforward enabling a DFM to offer a range of simple model portfolios, but to enable sufficient flexibility to avoid shoe-horning and ensure suitability needs careful management. Some platforms have been built with this functionality in mind but most are adding this as an after-thought and advisers need to explore the usability and treating customers fairly (TCF) issues very carefully.”

However, fears regulation may affect DFM access on platforms seems to have dissipated since the FSA’s last guidance in July and instead the relationship between platforms and DFMs has grown enough that in January The Platforum launched a DFM and outsourcing analysis tool.

Freddie Findlater, head of adviser platforms at The Platforum, says they started to look into the area following an increased focus from advisers that wanted to potentially outsource business but had questions regarding the agreements that have to be in place and where the risk lies.

“We have set up an information source, which is still small in that it doesn’t have whole of market coverage. But it is something we’re watching with interest as it has become a fairly widely adopted model as people are falling back from being fundpickers themselves.

“There were a few question marks last year around operations being slightly threatened by the FSA rules and the paper around CIPs. I don’t think that’s the case any more, but where there are still question marks and where advisers are still unsure is that when they enter into these relationships where does the client sit in all of this? The agreements you’ve got are effectively entering into a contract with three parties, the adviser, the DFM and the platform. Another adviser worry we hear about is how much contact the DFM is going to have to have with the end client if they’re managing money on the platform.”

DFMs, however, seem more than happy to leave the advice process alone and concentrate on doing what they do best and managing the money, of which there appears to be an increasing amount.

Among the platforms that offer access to third party DFMs, Novia is one of the largest in terms of its offering with more than 40 DFMs listed on its platform, and it is an area that looks likely to keep growing according to chief executive Bill Vasilieff.

He says: “We’ve got roughly 45 DFMs signed up to use the platforms, and typically they will offer their model portfolios on our platform, so we can hold the model portfolios and make them accessible to the adviser.

“Most of the new money on the platform now goes into model portfolios. It is approximately 90 per cent of money that comes into the platform that goes into models. There are two ways the models can be run, the IFA will run it themselves or the DFM will run it, and the DFMs are taking an increasing share of that market.”

Parmenion’s Mr Mein agrees it is a growth area as most advisory firms will be exploring the possibility of outsourcing their day-to-day investment management requirement to third parties.

But he adds: “Importantly, platforms are only one means by which such services can be accessed. Many DFMs have the capability to offer service directly to IFAs rather than via the additional costs associated with hosting on a third party platform. How this develops will be interesting to monitor.

“It is hard to see advisory businesses developing without having a highly flexible CIP embedded into their core service offering. Increasingly bespoke services will be offered by DFMs seeking to offer CIP services to progressive financial advisory practices. These may be in conjunction with platforms or otherwise. Either way, advisers are likely to be increasingly in the driving seat in demanding services and costs from those supplying services to their firms.”

Nyree Stewart is deputy features editor at Investment Adviser

Issues to consider:

According to the FSA’s finalised guidance on assessing suitability for replacement business and centralised investment propositions (CIPs), which include DFMs, there are some key issues firms should consider. It states poor outcomes can occur if firms, in particular, fail to:

• Consider the needs and objectives of their target clients when designing or adopting a CIP

• Consider whether the CIP is suitable for each client on an individual basis

• Establish a robust control system to mitigate risks which might arise from the CIP

Source: FSA