The lure for advisers to use discretionary fund management (DFM) services is a clear one. In an age where the wider responsibilities of financial planning, customer communication and regulation take up more and more time, outsourcing investment management to a third party is an understandable decision. The specialised expertise provided by a DFM also lends itself well to a focus on client outcomes.
Traditionally, outsourcing was implemented through a bespoke mandate agreed between DFM and adviser, or via an off-the-shelf managed portfolio service (MPS). Lately, however, it is a new variant – a model portfolio service accessed through an adviser platform – that has attracted the most interest from intermediaries.
Chart 1 shows that most DFM launches have focused on this area in recent years, although the slowing pace of growth also indicates that most providers now have their propositions in place.
On-platform MPS typically have lower costs, lower minimum investment levels, and their structure can ease adviser worries about a DFM eventually taking over the client relationship.
But there remain a number of bugbears that have yet to be fully eradicated by DFMs. Chief among these are charges: DFMs charge less via platforms because administrative duties are done for them, but advisers still have to add on the platform’s own charges as well as underlying fund costs.
As a result, advisers remain divided on the benefits. Dean Mullaly, managing director of Mark Dean Wealth Management, says: “I really don’t get why an IFA would hand over full control of the asset allocation and fund picking to a DFM, and lump the client with the additional cost burden?”
“Both [DFMs and platforms] are of more benefit to the adviser than the client in many situations,” Mr Mullaly says.
However, Lee Hartley, CEO of advice firm Fairstone Group, disagrees. Mr Hartley says DFMs provide an important function in order to free up time for advisers. “It removes any conflict of interest when advisers are forced to justify their own performance where they are running the portfolio themselves,” he adds.
Making the switch
Recent evidence suggests that advisers are increasingly favouring Mr Harley’s argument. In December 2016, support services company Threesixty surveyed 144 advisers and discovered that 87 per cent use DFMs; an increase of 9 per cent from the previous year. Data from Schroders’ annual adviser survey, also released in December, tallies with this, albeit less emphatically. It found the number of advisers who outsource had risen above 50 per cent for the first time in the survey’s history.
James Goward, head of sales support at Rathbones, says last year’s EU referendum result provided advisers with a new reason to outsource. “I got a sense that some advisers got to a point where they were raising the investment white flag around some of this. Their clients were probably expecting them to do something with their assets, but were quite unsure about which way to go with it,” Mr Goward explains.
The picture is not clear cut though. Even those favouring DFMs often still use more traditional methods for part of their client base despite the growing availability of discretionary solutions for smaller clients.