InvestmentsMay 1 2013

Investment insight: DFM model portfolios

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ByAimee Steen

Outsourcing solutions have been attracting significant attention for some time, prompted by the advent of the RDR. A key development in this area is discretionary fund manager (DFM) model portfolios, a way for clients with lower assets than typical discretionary minimums to access a form of bespoke management.

Research recently published by Investec Wealth & Investment said 47 per cent of advisers currently use DFMs and an additional 10 per cent are planning to do so. There are a variety of reasons for this: 89 per cent said they wanted to delegate the day-to-day investment management process; 82 per cent valued the ability to gain access to an investment professional; and 73 per cent cited a reduction in their administrative burden.

For high-end clients a full, bespoke DFM service may be appropriate. But for clients with less money to invest, a model portfolio is one way to access the skills of a full-time manager without paying a small fortune.

What are they?

Many DFMs have realised that advisers are looking to outsource investment decisions. Most have traditionally been the reserve of very high-net-worth clients, beyond the realms of a typical adviser’s client bank. But with the RDR now in full force, DFMs have developed a method of providing an outsourcing solution for advisers and clients in the form of model portfolios.

Instead of full-blown discretionary management, a DFM model portfolio is open to any investor with the required minimum sum. All monies are managed under the same investment strategy. The discretionary manager makes allocation decisions and they work within a particular remit – income, growth or a defined level of risk, for example.

A DFM model portfolio is broadly comparable to a multi-manager fund, but the portfolio is not unitised. Some DFMs do, however, offer a unitised version of their model portfolio, allowing access for investors with even lower levels of capital than required for the portfolio.

Benefits and drawbacks

The main benefit of a DFM model portfolio is that it allows access to a discretionary manager at a lower cost and a lower asset barrier. If your business model does not support in-depth fund selection but your clients do not warrant a full discretionary service, a model portfolio might be an appropriate solution.

It also allows you to spend more time focusing on the client’s goals and overall financial planning, while allowing someone with the right expertise to worry about specific fund allocation. An additional layer of cost is added on, however, which must be justified by a better client outcome than not using one.