Advisers’ switch to in-house DFM brings ‘box-ticking’ risk

Advisers’ switch to in-house DFM brings ‘box-ticking’ risk

Commentators have expressed alarm at an apparent increase in the number of adviser firms offering in-house investment propositions without the necessary internal expertise.

Though a trend towards outsourcing investment decisions has become apparent in the years since the introduction of the RDR, figures from the Lang Cat consultancy suggest the pendulum has begun to swing back as advisers seek to gain discretionary permissions (see graph).

But specialists are concerned that some advisers are justifying the launch of bespoke and model portfolios simply by placing external figures on their investment committees.

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One industry insider, who did not wish to be named, said the trend had become evident in the past year.

“You have advisers becoming discretionaries who are bringing people in to sit on their investment committee. [But] are they involved day to day? Should you able to tick that box [so easily]? There’s a fair bit of that going on.”

The source attributed the move to the fact that investment management represents an easier way to justify charges to clients than the “intangible” services involved in financial planning.

Graham Bentley, managing director of consultancy gbi2, said: “Having gone down the discretionary fund management [DFM] route, people are starting to feel like they are devaluing their offering altogether.

“What the regulator will expect if they are running money is they have some sort of investment committee arrangement to demonstrate they have monitoring and reporting.

“A number of businesses we know are looking to move to discretionary arrangements, which shows they need to be fully aware themselves and in control rather than go to the whim of a committee.

“You do wonder how many portfolios are bought on the basis of someone else’s asset allocation tools.”

Other reasons cited for the move back in-house include the charges levied by DFMs and the pervading fear that these businesses could eventually seek to take control of the client relationship.

But while others have acknowledged a move to in-house propositions, not all have witnessed a reliance on external investment specialists.

Jacqui Lockie, deputy head of financial planning at the Chartered Institute for Securities and Investment, said: “Many advisers have gone full circle and are bringing the investment decision making back in-house. They then create an investment committee and recruit suitably qualified individuals.”

However she dismissed the idea that advisers were unqualified as “a bit of a red herring”.

“Most advisers are already suitably qualified under FCA regulations to give this advice as it is retail products advice,” she said.