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.
With the effects of Mifid II unlikely to abate and other factors continuing to disrupt the DFM space, more winners and losers are likely to emerge, particularly if a handful of giant DFMs end up dominating the sector. For intermediaries, this could spell advantages such as lower fees. But consolidation brings with it a greater chance of homogenisation.
Add to that the increase in innovation being sought by other players, and it all means a greater onus on due diligence for advisers who opt to outsource their investments in the years ahead.
