Advisers rarely have a kind word for regulators, and sometimes with good reason. From investment regulations to the likes of the EU’s General Data Protection Regulation, a swathe of new obligations can make life more onerous for advice firms.
But even as intermediaries struggle with a growing compliance burden, new rules can create winners among the companies they turn to for services.
The discretionary fund management sector is one obvious example. It remains difficult to explain the explosive growth of the wealth management market without citing 2013’s Retail Distribution Review rules, which effectively led many advisers to outsource their investment decisions.
So far, however, the upshot of another major piece of regulation for the sector has been less clear cut. As discussed in last year’s DFM survey, the arrival of Mifid II, which came into effect at the start of 2018, has created a mixture of challenges and opportunities for companies in this space.
This makes it difficult to tell whether the industry will ultimately benefit or lose out because of the new rules. But 18 months on from the introduction of the regulation, our latest survey results suggest strains are beginning to show for some.
Neither DFMs nor their intermediary clients have had an easy year since our last analysis. With markets tumbling in the final quarter of 2018 on the back of concerns about tighter monetary policy and a trade war between the world’s two biggest economies, many client portfolios will have suffered in performance terms.
With Mifid II meaning that intermediaries have had to give clients a more complete breakdown of their costs and charges and the effects these have had on portfolios for the first time this year, poor returns have led to some difficult conversations. This means that justifying charges – whether the adviser’s own fee or that of a DFM – can prove tricky.
Anecdotally, the impact Mifid II has on whether advisers choose to outsource their investment responsibilities has already started to materialise. One adviser, Minesh Patel, told Money Management earlier this year that DFM charges were proving difficult to justify to clients in light of the new cost disclosures. As such, he expects to run more money internally in future.
On the other hand, both industry specialists and DFMs themselves have previously claimed that more intermediaries will choose to outsource their investment decisions because not doing so brings a greater compliance burden under the European regulation.
First, the good news
Our survey shows that, when it comes to assets, DFMs are still holding up relatively well. Of those that took part in the 2018 survey, a majority have reported a rise in assets this year.
The results, outlined in Table 1, might seem mixed, but they should still come as a relief for many DFMs, given concerns about the industry’s growth potentially slowing down have lingered for some time now. There is also no notable dip on the back of Mifid II disclosures so far. However, market movements have most likely flattered the numbers for some: the punchy equity market rally of 2019 has spelled good news for many DFM portfolios.