Are DFM platforms actually necessary?

This article is part of
Discretionary Fund Management - October 2013

Until a year or two ago, there had been an uncomfortable relationship between discretionary managers and platform operators, as both would prefer custody of the clients’ assets on their books.

In fact, several discretionary managers still argue that there is no need for a platform if the discretionary manager runs, or has arrangements with, the main tax wrappers (personal pension, ISA, bond).

The fact remains, however, that the majority of assets, particularly unwrapped collectives, are available through advisers only via platforms.

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So if the discretionary managers want to play in this market – and often they do – they would have to give up custody and form alliances with platforms. Many of them have already chosen to go down this path.

There appears to be a growing appetite for the new approach to managing client investment portfolios. As recently as about three years ago, most advisers were aiming to beat a benchmark, usually linked to the stockmarket.

Their strategy was to ride any highs and then with good research and analysis and a slice of timing luck, second guess the market corrections and move into safer assets before the market changes direction.

The approach that seems to be gathering pace now is managing portfolios through risk management. Advisers strive to keep volatility within the realms of the client’s attitude to risk, while at the same time making sure that the level of risk taken is delivering returns according to the client’s expectations.

Having analysed the discretionary market in the past four years, it is evident that when slight underperformance against a standard index such as the FTSE 100 has occurred, more often than not volatility has been lower than that index – a trade-off.

Looking back a little further, many discretionary portfolios actually rode the financial crisis relatively well by maintaining a consistent level of volatility regardless of the likely short-term direction of the market.

Advisers have embraced this ‘risk targeted’ approach and have looked to see if it can be duplicated on their platform, or more likely platforms of choice. Of course, discretionary managers do run such portfolios on platforms but they are not well marketed.

In contrast, the fund industry has picked up very quickly on the popularity of this approach and a raft of new risk targeted fund families have been launched in the past two to three years.

To ensure adequate distribution capability, many discretionary managers have launched unitised versions of their models, structured as fund families for the platform world and even beyond to the various mainstream tax wrappers.

There is no doubt that discretionary management on platforms is more complicated. Discretionary managers have to make arrangements with platforms to trade for all client portfolios, and terms between them need to be agreed.

There is potentially a four-way agreement between client, adviser, platform and discretionary manager.

It is significantly easier to facilitate anything unitised, including risk targeted funds, unitised funds and other managed funds.