Emma Wall, director of UK intermediary sales at Morningstar, says an alternative to a DFM is for advisers to run their own portfolios on an advisory basis.
On the plus side, Ms Wall says this allows advisers to keep full control of the client and minimises costs.
On the downside Ms Wall says more resources are required at the advisory firm, time has to be spent running the portfolio plus there are administration costs and certain qualifications and levels of experience are required to do this.
Another alternative is multi-manager funds. Ms Wall points out these are held within an Oeic structure so there are no capital gains tax issues on buying and selling holdings within the fund. They are also easy for clients to understand.
She says the client only has to sell one holding if they want to liquidise their investment and it is easy to monitor performance of multi-manager funds against a peer group.
However she warns that despite the high cost of bespoke DFMs, multi-manager costs can be higher than many of the mainstream-targeted discretionary managed portfolio services - and the client does not usually get to see a detailed portfolio breakdown of where their money is being invested.
Eric Clapton, chief executive of Wellian Investment Solutions, also points out the multi-manager solution is tax inefficient when held within a pension fund or an Isa because of the inability to reclaim income tax in those tax exempt wrappers.
Costs are often cited as a reason not to use a discretionary manager and to opt for a multi-manager instead, he adds, however like Morningstar’s Ms Wall he notes there “appears little difference in charges between these two solutions”.
Like Ms Wall, Mr Clapton says that the adviser can ultimately decide to turn their back on DFMs and make the investment selection themselves, with the help of a guided solution. This removes the requirement for a fund manager and therefore does save costs, he points out.
However, Mr Clapton says it is then the responsibility of the adviser to maintain a working knowledge of the funds selected and to efficiently administer fund changes as they are needed.
As an advisory rather than a discretionary solution, Mr Clapton says any such changes will need client permission at each transaction unless the adviser gains discretionary permissions, which may lead to a disparity in portfolios of a similar risk profile over time.
The adviser is then making investment changes for each client on a rolling basis as permission is received or as a review is undertaken. In volatile markets, Mr Clapton warns this inefficiency may prove highly costly.