One major fallout from the RDR is the surge in the number of adviser firms outsourcing their investment to discretionary fund managers (DFMs), and there is every indication this is likely to continue for some time to come.
Even firms who currently run their own portfolios in-house are finding it hard to cope with the huge burden of research, reporting and rebalancing – which requires them to obtain permission from clients before any changes can be made.
The industry press is littered with articles on the advantages of outsourcing investment management and the best ways for advisers to go about doing so.
There isn’t much discussion about the significant drawbacks to advisers going down this route.
I would suggest there are too many hands trying to take a bit of the pie, with advisers, platforms and fund managers being the most visible part of the chain (although there are 12 or so unseen others).
Throwing a DFM in the mix is just one too many, and this layering of fees will only become harder to justify going forward.
According to our friends at The Lang Cat, the cost of running a DFM portfolio on a platform could be as much as 1.2 per cent to 1.86 per cent per annum.
When you add a typical adviser fee of 0.8 per cent per annum onto that, the total cost of ownership to the client could be as much as 2.6 per cent per annum.
The onus is on advisers to demonstrate that every investment component – especially when there are additional costs – not only adds value to the client but that this additional cost does not wipe out the benefits.
Abraham Okusanya is founder and director at FinalytiQ
