Financial advisers’ reservations with regards to outsourcing business to discretionary fund managers (DFMs) have been well documented, but the rise in such services across UK platforms could be the panacea to alleviating these fears.
The arrival of the RDR, and with it an increased focus on cost and risk, has prompted a greater number of advisers to hand over the responsibility of investment management to DFMs, in spite of the perceived threat to client ownership.
Research from platform specialist The Platforum shows that 49 per cent of advisers are now using such a service for either bespoke or model portfolios.
But the analysis also highlights two opposing views in terms of the future prospects of DFMs offering investment solutions in the advisory market.
The first school of thought is that these firms will continue to gather assets as advisers retreat further from fund selection. On the other hand, the opposing philosophy believes that this business model is untenable – as end clients will begin to question what they are paying for if their advisers are outsourcing to other parties.
The Platforum envisages both scenarios playing out, but it suggests the one factor that could tip the scales in favour of more DFM use is the rise in on-platform DFM services, as this way advisers retain more control over their clients’ assets.
Senior researcher Annalise Toberman says: “On-platform DFM services go a long way to assuaging advisers’ concerns about client ownership when outsourcing to a DFM. Even when looking for bespoke rather than model portfolios from a DFM, advisers are demanding the money is run on their platforms.”
OCM Wealth Management founder Jason Stather-Lodge says he has witnessed a dramatic rise in the number of advisers looking to access his firm’s model portfolio services on platforms. He believes part of this is down to price – at 0.35 per cent per year compared with a full DFM service at about 1 per cent.
“Independent financial advisers [IFAs] understand that by doing this they are being regulatory friendly as they are focusing on ensuring client outcomes are delivered,” Mr Stather-Lodge says.
“Clients like the strategy of linking the two as it gives them peace of mind that they are being actively managed by experts on both sides of the desk – the IFA while they build the strategy, and the investment manager while the strategy is being managed.”
On the back of greater adviser demand, a larger number of DFMs are putting more model portfolios on to platforms. But Mr Stather-Lodge notes that issues can arise here.
He explains: “The functionality of the different platforms can cause us – as asset and investment managers – a headache. We have seen a significant increase in DFM firms that were historically at around 0.8 per cent, switch fees and develop model portfolio service [MPS] propositions at circa 0.35 per cent with no transaction fees.
“This will cause profitability problems with many firms as clients switch to an MPS, and so these companies will see revenues decrease dramatically with no comparable reduction in costs.”