If markets are approaching an inflection point, so too are adviser attitudes to how they manage clients’ money. After years in which many handed over control of vast swathes of assets to outsourcers, intermediaries now face a more nuanced decision.
My bet is that three different routes will prove equally popular in future: sticking with current arrangements, a Mifid II-induced push into finally ceding more control, or seeking to take money back off disappointing discretionary fund managers.
A combination of these last two factors has turned the spotlight back on DFMs this year. Mifid may drive more money their way, but equally it also focuses minds on costs, charges and performance.
But there is one other structural issue that may help out discretionaries. We all know that pension freedoms have made decumulation strategies even more attractive than they once were. That, in turn, may have led to a shift in the way advisers work with outsourcers, according to Defaqto’s latest DFM satisfaction study. The survey revealed a spike in the percentage of adviser investment business sitting in outsourced bespoke portfolios – from 20 per cent in 2017 to 31 per cent a year on.
The firm doesn’t have full confidence in the data: it describes the finding as “curious”, similar to what it previously labelled as a “suspicious” 2017 uptick in the amount of business advisers kept in-house. That duly faded away this year.
Nonetheless, it may be that the decumulation age is producing a preference for bespoke offerings. Defaqto says it’s “likely that decumulation investment pots could be larger, and the complexity of changing lifestyle as you get older may make these pots suitable for bespoke management”.
An alternative is that advisers are now prepared to do more business with their outsourcing partners, having liked what they have seen so far. Intermediaries’ satisfaction levels have risen across a number of different areas this year.
But DFMs can’t relax just yet. Despite this nascent shift to higher-margin business, the survey found that they still struggle to meet adviser expectations in many areas – largely because said expectations are rising at least as fast as satisfaction levels.
There’s also a continued performance headwind to confront. Most DFMs still benchmark themselves against the old Wealth Management Association indices. But a change in the way these yardsticks were constructed back in 2017 means the indices are more gung-ho than they once were. That means wealth managers tend to lag them when times are good.
When times are bad, meanwhile, an aversion to bonds tends to count against them: nervous investors elsewhere in the market push yields down to record lows, and prices up.
But these issues are arguably less significant when it comes to retirement income portfolios. The decumulation phase doesn’t easily lend itself to risk-on portfolios, and the inclination to shun bonds might be overcome by the need to liability match. It’s in this space that DFMs may truly be able to prove their worth – or otherwise – to advisers.