Alternatives to a DFM

Let us start by taking a look at the current fashion for multi-strategy funds and the traditional private client banks as two potential alternatives to using a DFM.

Mark Barrington, director of the managed funds service at Waverton, says advisers considering multi-strategy funds as an alternative to a DFM should be aware this vehicle does not provide the personalised approach of DFMs.

For example, Mr Barrington highlights the tax management within general investment accounts.

When it comes to private banks as an alternative to a DFM, Mr Barrington says these are often only able to deal with clients at a higher minimum than DFMs.

Mr Barrington says: “They can often provide a broader suite of services (for example, banking as well as investment) but some advisers have said they are reluctant to use private banks because of the danger of the banks sales team contacting the client without the adviser’s knowledge or approval.”

Multi-manager is a convenient and easy solution for the adviser but perhaps not the best outcome for the client Guy Stephens

However it should also be noted this is sometimes also raised by advisers as a concern about DFMs.

Guy Stephens, managing director of Rowan Dartington Signature, says alternatives can be found in unitised multi-manager, unitised multi-asset, or a suite of adviser-branded own funds.

An adviser with discretionary permissions, which bypasses the need for a DFM or a traditional advisory arrangement, is also an option.

Mr Stephens says unitised multi-manager funds were very popular with advisers before platforms started offering DFM services.

However, Mr Stephens says the total expense ratios (TERs) are relatively high and the performance of many multi-manager solutions is far from stellar.

Mr Stephens says: “A convenient and easy solution for the adviser but perhaps not the best outcome for the client.”

Multi-asset funds are a convenient single solution for a client, Mr Stephens says, but are only really applicable for smaller sums.

However, again, he says they tend to have higher TERs as they provide not only the underlying fund selection, but also the asset allocation to justify that extra charge.

When it comes to an adviser obtaining discretionary permissions and managing client assets on a platform using a suite of self-managed models, Mr Stephens points out this gets around the administrative hold-ups under an advisory arrangement.

This approach also avoids paying for a DFM and enables the adviser to build a suite of model portfolios with a performance track record which he can market to his clients.

However, Mr Stephens says this flies directly in the face of what many advisers believe they are employed to do by their clients.

He says: “We all know that the most challenging part of advising clients on their financial affairs is the ongoing performance of their investments.

“Structural advice on tax, inheritance, pensions, trusts, etc, is the application of factual information to a given client circumstance and although subjective in many cases there are usually relatively few alternatives to a given client case.

“The room for error is relatively limited so long as the adviser sticks to the straight and narrow and doesn’t become too creative.

“The investment markets are entirely different with today’s blue chip having the potential to become tomorrow’s basket case. 2015 was a reminder of this to all investors as the oil price and commodities markets collapsed.

“Does the adviser really have sufficient self-belief that he and maybe a dedicated single investment manager in his office can safely navigate these challenges and maintain performance?

“If he gets it wrong, he risks his entire business as clients will walk. If he has employed a DFM or several, he can beat up the DFM and potentially sack him for another and this is part of what the client pays for in his adviser charge.

“Taking full responsibility for the investment management is not a wise business move as the downside could be catastrophic whilst the upside is no more than supportive of the strategic growth of the business.”

An adviser with relevant Financial Conduct Authority (FCA) permission choosing to manage customer investments on a discretionary basis themselves will have more direct control over a client’s portfolio, Nick Holmes, managing director of Brooks Macdonald Asset Management, notes.

He says this approach will also allow them to further justify their fee to the client.

However, Mr Holmes agrees with Mr Stephens that these additional responsibilities represent additional regulatory and business risks and are likely to increase the adviser’s costs.

Ultimately when providing a discretionary service, Robin Beer, head of intermediaries division at Brewin Dolphin, says he sees the primary role of a DFM as constructing and managing a portfolio in accordance with a risk mandate stipulated by the adviser.

In other words, Mr Beer says it is a DFM’s job to undertake investment suitability.

Furthermore, within a bespoke discretionary service, Mr Beer says the DFM will also take into account addition requirements when creating the most appropriate investment solution, such as tax efficiency, income levels and ethical restrictions.

Therefore to build a total alternative to a full bespoke discretionary service an adviser may also have to employ risk profilers, accountants and legal advice – and pass on the cost that goes with that to the client.