Nine out of 10 advisers now outsource to a DFM

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Nine out of 10 advisers now outsource to a DFM

A survey carried out by support services firm Threesixty found 87 per cent of the 144 advisers questioned currently use the services of a discretionary investment manager, either through third-party platforms or directly.

This is up from 78 per cent a year ago, indicating the increasing shift towards discretionary managers.

Standard Life’s model portfolio service was the most popular discretionary scheme, with 15 per cent of advisers using the offering.

Transact and Parmenion came in second with just under 10 per cent of advisers using their model portfolios.

Model portfolios have varying levels of risk and aim to be an efficient way of investing money by managing a number of strategies within one offering.

However, half of the financial advisers questioned use a model portfolio service that is not managed by these seven well-known DFMs, which also include Novia, Elevate, Ascentric and Seven Investment Management.

 The downside is cost, which can vary a lot and is compounded by the charge an adviser adds on top Phil Young

Phil Young, managing director at support services Threesixty Services, said: “We’ve observed the gradual increase in the use of DFMs over the years, but this has exploded with the use of DFM model portfolios.” 

“Model portfolio services have grown to become the predominant way for advisers to use DFMs in terms of frequency and client numbers.”

Despite this, he said there is a still a sizeable amount of money being run under more traditional, bespoke DFM relationships, which reflects a smaller number of clients in this type of service but with typically far higher asset sizes.

In the survey, advisers consistently cited two reasons for outsourcing: access to greater investment expertise than they can afford to employ themselves, and reducing the time and effort spent by them on the administration of portfolio switches.

“Advisers often view DFMs as more ‘credible’ for them,” Mr Young said.

“The downside, however, is cost, which can vary a lot and is compounded by the charge an adviser adds on top. 

“In the light of the FCA’s asset management study we expect advisers to scrutinise value for money more than ever in 2017 and beyond, as the ability for a DFM to add value beyond their fees with tactical asset allocation will be tested.”

Dan Farrow, director of SBN Wealth Management, criticised this outsourcing trend, saying financial advisers are paid to manage money, which includes managing clients’ investment portfolios.

“DFMs are great for advisers who don’t know how to deal with their clients investments, or just don’t feel confident to look at what’s going on in the world, choose an appropriate strategy and the communicate it." 

Mr Farrow was also critical of the extra fees clients are expected to pay to use a DFM on top of the adviser fee.

“It’s even better for the IFA when he or she takes an upfront fee and then charges 1 per cent on top of the DFM’s fee of 1 per cent," he said.

“Once the underlying funds annual management charge is added, the clients annual hurdle rate, before making any return could be as high as 3 per cent.  

The SBN director added: “If 87 per cent of IFAs are really using DFMs, then perhaps we shouldn’t be surprised if the FCA starts looking at our costs.” 

katherine.denham@ft.com