As with most areas of the investment industry, discretionary managers are facing increased regulation, pressures on cost and transparency, and, of course, market volatility.
In the run-up to the EU referendum on June 23, most asset classes have had their ups and downs; sterling has fallen significantly, equity and bond markets have experienced volatility, and commodity markets have been the trickiest of investments.
Ronnie Binnie, head of business development at Standard Life Wealth, suggests there are four particular themes affecting the wealth management profession at the moment – the market environment, regulation, operating models and client behaviour.
He explains: “Client behaviour is an interesting one as the wider financial services community looks to regain its customers’ trust. They will want to see how an investment solution practically helps them achieve their goals. Wealth managers and discretionary investment managers who understand, innovate and deliver client-centric, goals-based solutions will be the winners.”
He says many financial planning businesses will continue to review and refine their centralised investment and retirement propositions, particularly in the light of the pension freedoms.
“There is a shift in the distribution of wealth management propositions and discretionary investment management from direct to customer, to delivery through an intermediary such as a financial planner. This is due to the rise of new money through the increased wealth of the baby boomers and their need for holistic financial planning, as well as investment management.”
Mr Binnie points out there are nine million baby boomers – those born between 1946 and 1964 – bringing £700bn into the “at retirement” market over the next 10 years.
“The changes to regulation introduced in April 2015 have provided pension freedoms for this generation and we have seen an increase in the demand for advice, particularly around defined benefit to defined contribution pension transfers and ‘at retirement’ planning.”
Christopher Aldous, head of distribution at Charles Stanley, says:
“Cost pressures are definitely an important factor for DFMs serving the intermediary market, as is a highly competitive marketplace with continuing pressure on fees. One of the costs affecting DFMs is subscribing to rating and profiling services that may have been adopted by an adviser firm.
“The firm will then insist that a DFM must subscribe to the rating service before they will be considered and this adds another layer of cost and causes further attrition to overall revenue. The only way to overcome this cost drag is if there is a commensurate increase in asset-gathering volumes.
“The cost of regulation also continues to mount and next on the horizon is MiFID II. This will be a major project for most DFMs and involves new measures such as quarterly reporting and a full disclosure of all costs. There’s nothing wrong with either of these in principle, but it is hard to see how the industry will continue to bear the additional cost and workload of ever-increasing regulation without the client eventually being disadvantaged in some way – either due to being offered increasingly standardised products, or by being asked for higher fees.”