DFMs still grappling with regulatory overhauls

  • Learn about how DFMs are faring
  • Grasp the impact of new rules on the sector
  • Gain an understanding of what DFMs are focusing on

Respondents’ use of segregated mandates is detailed for the first time in Table 3. Several do now use these structures, though companies have various approaches when it comes to the asset classes for which they choose this approach. The table also gives our normal breakdown of the extent to which firms use the likes of passive funds, investment trusts and direct holdings in their core portfolios.

In Table 4 we once again look at how DFMs’ buy lists shape up. Having previously looked at how buy lists have changed in the past, this year we asked DFMs how they expected these to develop in the coming years. Of the 25 firms that detailed how they expected their buy lists to change, just four thought they would get larger. Five expected them to shrink, with 16 expecting them to remain the same size.

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Elsewhere, there are still some familiar bugbears facing the industry: several firms complained about an inability to straightforwardly compare how DFM portfolios perform. AJ Bell, for one, criticised a “veil of opacity” in the industry that it put down to the lack of standardised performance reports. However, Asset Allocator has since shed some light on this issue, detailing how a large number of Balanced model portfolios have performed in the first half of 2019.

As the anonymised results show in Chart 1, DFMs have generally managed to ride the equity rally that marked the first half of this year. However, benchmarks have a big influence on whether or not DFMs appear to justify their fees: most have beaten the Arc measure of aggregate industry performance. But the FTSE WMA benchmark, a higher-octane index with a decent correlation to equities, has raced ahead of most DFMs’ efforts.

It’s not just costs and comparisons that might be troubling DFMs and the intermediaries who use them; some in our survey cited the “agent as client” model as a concern.

A recent report from the Personal Finance Society and consultancy Diminimis suggests that issues with this system, whereby an adviser acts as a DFM’s client on their own customer’s behalf, are still common across the industry.

One unnamed wealth business quoted in the report realised that “many of their supporting advisers are not operating with the legal authority of ‘agent’ when supporting their MPS solution”. Cases such as these could create legal headaches for both intermediaries and DFMs.

Beyond that, other changes continue to feed through into the industry, including a bout of merger and acquisition activity. Sanlam acquired Thesis earlier this year, and in August Tilney revealed it was in talks to buy Smith & Williamson.