In an RDR-compliant world the benefits of a discretionary fund management service are accentuated and advisers should see this as an opportunity to examine the best way to manage client assets.
Many advisers already use DFM services. An annual adviser study found that 47 per cent of respondents now have at least one DFM relationship. The research found that the average proportion of client funds outsourced by advisers who use DFMs increased from 28 per cent in 2011 to 34 per cent in 2012.
A quarter of the advisers surveyed said they outsource more than half of their clients’ portfolios to a DFM for bespoke investment management, an increase from 22 per cent last year. The average number of DFMs used by advisers had also increased from two to, on average, two and a half.
Increasing use of DFMs is to be welcomed but there are clearly large numbers of intermediaries yet to consider the rationale behind outsourcing. There remain a number of misconceptions about using a DFM provider and it is important to address these fully.
Some advisers fear that DFMs will poach their clients but the reality is that DFMs work closely with the adviser and together offer their clients an enhanced, value-added service. Others are concerned that the relationship with their clients will be weakened by introducing a DFM but in contrast clients are found to fully appreciate the adviser’s expertise and value their ability to bring in a specialist investment partner.
Another refrain is that a DFM service is expensive. Again the reality is that a DFM provider can construct a broadly-based segregated portfolio, including asset classes and stocks that are suitable to the client, with a total cost which is not dissimilar to an off-the-shelf pooled or collective approach.
Finally platforms are viewed by some advisers as a panacea to challenges around DFMs, providing them with the only cost-effective medium through which they can aggregate assets, gather revenue and receive comprehensive reporting. While a very important option and an effective proposition, platforms are not appropriate for all clients. DFMs offer a more sophisticated service.
According to the study, the most important criteria cited by intermediaries working with a DFM are quality of service (by 92 per cent of respondents), investment performance (92 per cent), a high quality relationship (89 per cent) and transparency around charges (85 per cent).
It was not surprising to see investment performance and service quality at the top of the list. The primary purpose of a DFM is to offer a strong investment management service for advisers, maximising opportunities and working with them to provide a richer, more in-depth service than they might be able to offer by themselves.
Reputable DFMs concentrate on portfolio management, ensuring client assets remains at all times appropriate to each client’s unique set of circumstances and needs. The adviser can reduce the potential for poor portfolio performance due to inactive or inappropriate asset allocation.
Well-run portfolios must evolve to reflect changing economic and market conditions and a professional investment manager is best placed to capitalise on these and act on market timings. A professional investment manager will usually also allow client portfolios to include asset classes or individual stocks that are difficult for a financial adviser to access directly.
DFMs can build fixed income, structured products, alternative investment instruments and bespoke portfolios into an adviser’s product offering and help them to have a better understanding of them. Due diligence on a single DFM provider is more straightforward and efficient compared to a similar process on every fund manager that an adviser works with.
On top of this primary focus to deliver strong investment performance, I also see other benefits and opportunities.
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. And having more time to focus on client service and communication, dealing with new client opportunities and expanding the services they provide are further benefits for advisers.
One of the key obligations of RDR is greater transparency and clarity around charging and service costs. Transparency is at the heart of many DFM services. By outsourcing to a DFM, advisers and their clients can better visualise and apportion investment management costs.
I believe that RDR may be the catalyst for many financial advisers and intermediaries to start a discussion with a DFM provider. The study found that 20 per cent of advisers said they would be increasing the number of client portfolios outsourced due to RDR, with just 4 per cent claiming they would reduce. However 76 per cent envisaged no real change – the expectation is that many are taking a wait-and-see approach to RDR, looking to ascertain how the market evolves in the coming months.
The financial advice industry is undergoing a huge change. The rise of platforms and RDR are just two of the game-changing challenges for all companies involved in this process. It is a critical time in the evolution of the advice industry and a time for advisers to maximise all opportunities open to them to strengthen and improve their service proposition. Risk should never be underestimated and by using a DFM, financial advisers can provide a better investment management service and reduce the potential for poor performance.
There is clearly very positive momentum in the market for outsourcing to an investment expert. The next six months will demonstrate the extent to which the trends identified in our research will materialise.
Mark Stevens is head of intermediary services of Investec Wealth & Investment
Key points
The benefits of a DFM service have been accentuated by RDR and financial advisers should see this as an opportunity.
The most important criteria cited by intermediaries working with a DFM are quality of service and investment performance .
By outsourcing to a DFM, advisers and their clients can better visualise and apportion investment management costs.
