The divide between financial advice and investment management has narrowed sharply over the past 30 years, and anyone lucky enough to come into a capital sum now finds themselves with many choices: tax-efficient savings vehicles, pension planning, offshore bonds or buy-to-let.
Relatively few will consider a stockbroker – restyled nowadays as an ‘investment manager’– as their first port of call as they are more likely to look for a good financial adviser. For a while this trend did not unduly threaten investment managers, since they could point to a clear distinction between the specialised financial planning advice given by advisers and the investment management work which they carried out.
As the need for financial planning expanded, many consumers decided their adviser should be their primary source of information. This in turn created opportunities for the larger and more savvy investment managers who morphed into discretionary fund managers (DFMs) and began to offer outsourced management services for larger adviser firms to pass on to their end clients.
Until recently this worked well, with the mainstream DFMs providing a plethora of solutions to adviser firms such as model portfolios, inheritance tax planning portfolios and bespoke offerings. However, the larger adviser firms rapidly realised that although they controlled the client relationships, they were giving away much of the value added to the DFMs they employed on behalf of their clients.
Some adviser firms saw financial planning as a specialist service, but felt many DFM services looked quite similar to one another. DFMs understood this dynamic and looked hard at their fees, some becoming more efficient so they could offer a competitively priced service for adviser clients, who were often paying a hefty annual fee for a retained financial planning service. Some DFMs offered solutions built around passive products to strip out costs and assist advisers in raising their own fees post-RDR while not increasing the overall charge to the client.
This uneasy coexistence continued for a while, but soon adviser firms began to wonder if they could further boost their added value, operating margins (and eventual flotation value) by offering the whole package – combining financial planning and investment management.
At the same time, investment firms realised that their position as a potential ‘trusted adviser’ was weakening. They could no longer be just an investment manager; they had to be financial planners as well. Thus the wealth manager concept took off.
In particular, investment management firms started to build up teams of financial planners, often simply to ensure their clients who needed financial planning advice did not go straight to an adviser, who would then recommend a competing DFM solution.
Some firms have been fairly aggressive, seeking to cut out the adviser altogether and use their market power to attract new clients. This has sent alarm signals to the industry, and some companies now refuse to recommend DFMs that have their own adviser arms.
