Explosion of DFMs makes it tricky for advisers to navigate

Research from Defaqto earlier this year showed total discretionary assets under management had reached £263bn at the end of December 2015, an increase of 14 per cent on the previous year and up 20 per cent compared with 2013. 

Last month an update suggested that while this growth was continuing, the focus is on one particular area of the discretionary fund management (DFM) industry: the rise of model portfolio services (MPS). 

In the research note ‘MPS: Segmenting the market’, David Boyle, a researcher of funds and DFMs at Defaqto, notes the organisation is “continuing to see new entrants to the marketplace offering MPS solutions to advisers that are designed to be scalable, efficient and low cost, as well as existing DFMs enhancing their MPS ranges”. 

Mr Boyle adds: “MPS portfolios in the main are either multi-asset, multi-manager investments targeting specific volatility bands [risk-targeted], or aim to achieve outperformance whether it be absolute or relative to a peer group [return-focused].”

This explosion of offerings can make it a tricky area for advisers to navigate; whether they choose to allocate investments themselves or outsource to a third party can also have an effect on due diligence requirements and where the responsibility lies in terms of the client’s investment solution.

Mike Roberts, managing director and head of innovation at PortfolioMetrix UK, says the DFM sector “is overcrowded and the old-style bespoke DFM model is looking decidedly old-fashioned and past its sell-by date”. He says advisers want to offer their clients effective investment performance “in a way that keeps them as the relationship manager, yet allows them to run profitable businesses”. 

Mr Roberts explains: “The main issue we hear from advisers about traditional bespoke DFMs is that they are expensive, yet often deliver mediocre results via portfolios that often don’t look very different to the models offered by the DFMs. There is also concern about how introducing a third-party investment manager can complicate the relationship between advisers and their clients.

“Another issue when advisers opt to use a DFM MPS via a third-party platform is that, while the investment decisions are taken by the DFM, the responsibility for the suitability of the investment can remain with advisers. This means that should a client become dissatisfied with investment decisions taken by the DFM, it is the adviser and not the DFM who is liable and has to face the consequences.”

Alan Beaney, investment director at RC Brown Investment Management, says the continued trend for integrated solutions in 2016 has led to many financial advisers setting up their own fund management arms, and managers setting up, buying or integrating financial advisory arms.

“Examples include Sanlam merging its advice and fund management arms; Tavistock setting up its own fund management arm and St James’s Place buying Rowan Dartington,” Mr Beaney says.

“The driving force behind this trend has been the pressure on industry revenues in the post-RDR world. However, it is very questionable whether this whole process has been beneficial to either the end client or [if] it has generated the returns the protagonists have predicted. Nevertheless, this is an ongoing trend and will continue until either the regulator steps in or clients/shareholders become increasingly dissatisfied with the results.”

With a number of macro and regulatory challenges looming, including the US election, Brexit negotiations and the implementation of Mifid in 2018, greater transparency and information from the DFM sector can only be a good thing for both advisers and the end investor. 

Nyree Stewart is features editor at Investment Adviser