DFMs still grappling with regulatory overhauls

A recent report by the Office of Tax Simplification features suggestions that will already have grabbed the attention of some advisers, such as cutting the seven-year rule on inheritance tax. Yet the body also fired a warning shot at Aim portfolios, warning that business property relief was “not necessary to prevent [a] business from being broken up or sold in order to fund the payment of inheritance tax” when it comes to third-party investors in Aim-traded shares. While the OTS fell short of recommending a full crackdown on Aim portfolios, it could be a sign of things to come.

All shapes and sizes

Beyond a reassessment of their fees and specialist offerings, DFMs are also focusing on the best structures for clients’ assets. One popular approach for those with scale has been to use segregated mandates, whereby asset managers will establish and run a pool of assets specifically for the DFM in question. In such cases, the wealth manager can normally get preferential fees and a greater say in how investment parameters are defined.

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.

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.