Discretionary Management  

Shift to DFM use continues but cost concerns persist

This article is part of
The Guide: Outsourcing

Shift to DFM use continues but cost concerns persist

Outsourcing by advisers to discretionary managers is a trend that has accelerated since the RDR in 2012, and it looks set to continue.

The latest DFM Service Review 2017 by Defaqto shows that all types of discretionary services, whether they are model portfolio services (MPS) through discretionary fund managers (DFMs) or platforms, or bespoke services, are on the rise. 

While more advisers appear to be embracing an outsourcing approach, the Defaqto report notes: “[The] figures further support the idea that advisers are providing a wide range of choice, which strengthens the argument that robust suitability tests are being followed with a wide range of different propositions available.

“Among those advisers using DFMs, there does appear to be a trend developing. Advisory business in particular is shrinking in favour of a rise in MPS use on platforms. This is perhaps a trend we would expect as advisers strive for efficiencies by outsourcing investment. 

“Coupled with the fact that the majority of client assets are now on a platform, this points to a trend we would expect to see continuing.”

Ben Willis, investment manager and head of research at Whitechurch Securities, suggests time and expertise appear to be the main drivers for the demand in DFMs and outsourcing. 

“By outsourcing they can save time and utilise the expertise of those who are totally devoted to constructing and managing client investment portfolios,” he explains. 

“This also distances some of the risk as the adviser will not be wholly responsible for the investment advice but will be responsible for the selection of the wealth manager.”

While the wealth management industry is continuing to evolve, performance and costs are likely to remain key areas for the market.

Mr Willis adds: “Pressure to lower costs will no doubt continue, while more and more firms are entering the wealth manager market. 

“Some level of standardised performance is an area that a lot of wealth managers would like to see. However, even though we can compare costs between firms, it can prove difficult to compare performances.” 

That said, Quilter Cheviot investment director David Miller suggests the outlook for the sector is positive, although cost control remains important. 

“DFM’s that invest directly in securities rather than simply aggregating a selection of funds have an advantage, which allows them to build sensible portfolios that are designed to meet client’s needs,” Mr Miller says. 

“Those that select funds run the risk of investing in expensive closet trackers or pursuing performance by selecting [funds] that have achieved top-decile performance in the past, but will not necessarily [do so] in the future. Successful investment is all about control, transparency and cost-effective implementation.”

Mr Willis says advisers need to ensure they conduct due diligence on each firm they are considering, including past performance, costs, company structure and how they manage money. 

“The industry has become very cost-conscious and transparent since the RDR, which is a good thing,” he adds.