DFMs and platforms – how to meet client needs

This article is part of
Discretionary Fund Management - October 2013

We are approaching the end of the first year of the post-RDR world which has had the unsurprising impact of accelerating the move to outsourcing of investment solutions.

The removal of commission for new advice has motivated business-savvy advisers to recognise that the efficient delivery of expected financial planning outcomes drives a successful business, and creates satisfied clients.

Financial planning is a complex service requiring a high level of experience and qualification, and difficult to deliver without face-to-face advice.

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The results can very clearly be compared to costs – the client receives a benefit through tax saved or capital efficiently created and dispersed, that is substantial compared to the cost.

Investment management is a separate and distinct skill; and some might claim it is an ‘art’. It carries significant risks for the client and the adviser business if not performed consistently, with robust governance and processes.

It should be no surprise then that adviser charging and need to manage operational costs has encouraged advisers to enthusiastically adopt centralised investment propositions in the form of model portfolios, and in many cases outsource completely to a discretionary fund manager.

The platform industry has seen huge demand for model portfolios. While it is estimated that only 20 per cent of platform assets are in models, this figure is depressed by 13 years of investment flows that had no modelling functionality to support them.

There is however a rising number of advisers who seek a means by which they can offer their clients a different way of achieving their goals. It must be underpinned by a believable and deliverable investment process designed and delivered by professional, and academically robust investment process, as opposed to “fund picking” or copy and pasting fund lists from research companies. A significant proportion of these advisers have decided to use discretionary fund managers (DFMs).

Where advisers have a discretionary solution in place, the onus has been on reducing costs by pressurising DFMs to blend passive solutions, and platforms to lower costs.

Many firms looking to implement a solution are demanding a much larger exposure to passive instruments as they seek to operate within the confines of a total cost of ownership that is significantly less than 2 per cent. Excess charges for delivery of alpha need to be justified with conviction and evidence.

DFMs on platforms are a relatively recent innovation and the process for using them has already started to evolve with advisers using several DFMs with different themes such as wealth preservation, socially responsible investing, passive and active, for example.

This helps the adviser to match the correct DFM to the client’s requirements and avoids the accusation of ‘shoehorning’ a client into a centralised investment proposition (CIP), but retains the operational efficiency of one administration platform. Once the correct DFM has been selected, the process for assessing the client’s attitude to risk begins. Matching this to the correct model highlights another potential issue.