Surge is expected in use of DFM services

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.”

Michael Barrett, consulting director at The Lang Cat, notes that most platforms do provide access to some DFM portfolios, although typically a restricted range. For example, he notes Brewin Dolphin’s portfolios can be accessed via a number of platforms, whereas Standard Life offers access to around eight DFMs.

He says: “Our view would be that the trend to outsource is generally a good thing. It allows advisers to have a much more process-driven and cost-effective business, but more importantly it should ensure the client’s investments are managed by experts, with the adviser still handling the wider financial planning and client relationship.”

But there are challenges here too. “We do not believe there is any way for an IFA to achieve an effective whole-of-market, time-efficient, quantitative analysis on the full range of outsourced solutions. Fund-charging data is not uniform across the industry, let alone portfolio data.”

Research from The Lang Cat found that around half the advisers it surveyed said accessing data regarding the costs and make-up of DFM portfolios was either “hard” or “very hard”.

In spite of the sector’s progress, Mr Stather-Lodge thinks getting model portfolios on platforms is in itself hard work, adding “there are still some gatekeepers out there”. He says in his experience, platforms are acknowledging the change in distribution and are accepting it.

Philip Scott is a freelance journalist

INNOVATION THROUGH TECHNOLOGY

Patrick Ingram, head of corporate relationships at investment specialist Parmenion, comments on the growing interest in advisory services:

“The World Wealth Report 2015 – by Capgemini and RBC Wealth Management – highlights demand for advisory services is not on the wane, with the highest level of interest coming from younger, high net worth individuals [HNWIs].

Wealth managers are underestimating the interest from all HNWIs in using automated advisory services. The report found only 15.6 per cent of wealth managers in Europe think HNWIs would consider using automated advisory services, when in fact 45.8 per cent of HNWIs when asked directly said they would do so.

Real growth in the advisory sector will only come through innovation. Therefore, the key to tapping into the demand lies in leveraging technology.

Innovation in the way goods and services are delivered has transformed every other sector, yet within wealth management the power of technology to create value lies largely untapped. Advisers and investment managers now both depend on implementing financial technology for their futures.”

HOW TO SELECT A PLATFORM DFM PROPOSITION

Research from Defaqto shows more advisers are outsourcing their investment proposition, with many using platforms as a key tool.

In April 2015, the independent financial research firm published a case study, ‘DFM propositions on platforms’, which outlined a due-diligence checklist for selecting an on-platform DFM service.

Things to consider:

When selecting a DFM:

• Parent size and ownership

• Credit ratings and financial strength measures

• Brand strength

• Assets under management

• Longevity in the market

• Style and approach of the investment process and service

• Research capability

• FCA permissions held

When choosing platform portfolios:

• Nature of the relationship between adviser, client and DFM

• Number of portfolios available

• Asset classes used

• Range of investment vehicles used

• Use of clean share classes

• Performance benchmarks and any track record

• Charges, including dealing

• Availability within tax wrappers

When considering adviser and client support:

• Client reporting

• Market commentary

• Portfolio updates, including rationale for any changes

• Adviser meetings and seminars

• A range of support, including face-to-face, telephone, platform account managers and technical support

Source: Defaqto