InvestmentsMay 23 2016

DFMs: Moving with the times?

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DFMs: Moving with the times?

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.”

EXPERT VIEW

DFM TRENDS

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.”

James Horniman, portfolio manager and head of adviser solutions at James Hambro & Partners, notes these clients are much more sensitive to volatility, which means an increased focus on the underlying portfolio.

“When outsourcing the investment management – especially if you are leaning towards a cost-effective, actively managed portfolio solution – it is worth looking for a portfolio run to a specific mandate, with a focus on yield and dampened volatility.

“It is also worth challenging the manager as to how they will achieve this. Historically they might have relied on fixed interest to provide a volatility brake, but that option looks less appealing at the moment. The adviser has a valuable part to play in helping the client manage their cash flow in retirement – it could be that they are drawing down more than they genuinely need from their pension pot and, when markets are falling, it may be sensible to draw less.”

Regulation is also likely to be a headwind to the sector, with rules such as MiFID II – currently scheduled to apply from 2018 – increasing transparency around costs associated with managing client wealth.

Mr Binnie adds: “There should be nothing to fear as long as the costs are fair. There will also be additional costs of providing higher levels of risk management to meet the ever-increasing minimum standards expected by the regulator. Operating models will need to move with the times. It isn’t the case that there will be pressure on costs – there is pressure on costs now. Those who embrace technology but don’t lose the personal touch will see improved margins with the additional benefit of higher levels of client retention.”

Guy Stephens, managing director of Rowan Dartington Signature, points out that increased regulation could lead to “further consolidation”. He explains: “Cost pressures are an issue for the smaller DFM with funds under management under £250m, posing viability issues post-Mifid II.”

But Mr Binnie adds: “A downward pressure on cost isn’t a new phenomenon. Like everything else, wealth managers need to provide value. If you cannot show value, then it is just a cost comparison and we will become a commoditised industry.

“Regulation is often seen as a bad thing. At its core, it is about providing good client outcomes. Isn’t that what we all want anyway?”

Nyree Stewart is features editor at Investment Adviser