Cheapest DFMs grow fastest as advisers watch cost

Cheapest DFMs grow fastest as advisers watch cost

The cheapest discretionary fund managers (DFMs) are proving to be the most popular as those firms charging 0.6 per cent or less grew the fastest during Q3 of this year. 

At the end of September, average assets under management at the cheapest DFMs sat at £2.6bn, with average quarter-on-quarter growth up 14 per cent, according to a NextWealth report published today (December 7).

This compared with DFMs charging between 0.6 and 0.8 per cent (MPS fee + OCF) where Aum reached a lesser £1.7bn in the same period, growing by almost half (8 per cent) the rate of the cheapest firms.

Those DFMs charging between 0.8 and 1 per cent saw assets grow to £2bn by the end of September, up 7 per cent, whilst those charging over 1 per cent held Aum of £2bn, up 9 per cent.

Just 10 DFMs from the 38 which submitted data to NextWealth had charges of 0.6 per cent and under.

"Our report confirms that price is influencing flow,” said Heather Hopkins, NextWealth’s managing director.

“Price competition is fierce - especially for the annual MPS fee. Many DFMs cite price competition as a key business challenge, making innovation and differentiation more challenging. 

“DFMs told us that there is less pressure on the OCF [ongoing charges figure] but our data suggest that those with the lowest charges overall are growing fastest."

A survey from RSMR last month found the majority of advisers thought charges were more important than investment suitability when picking a DFM. 

Some 81 per cent of 108 advisers surveyed by RSMR said the key feature of a good provider of model portfolio services was charges, with the same percentage saying performance was also key.

NextWealth’s report showed DFMs are not using their pricing power to reduce fund costs, however. Clients of advisers using discretionary MPS paid about the same as the average.

Some DFMs expressed frustration at not being able to access preferred share classes. 

Hopkins said: "We would expect fees for funds to be lower for clients of advisers using a DFM - our data suggest they are not.

"An advantage of using a DFM should be to pool buying power to push down fund fees. The fund charges however are almost identical, suggesting that DFMs are not effectively using their buying power to reduce cost."

She said it was possible that this was a result of a higher allocation to active funds but most DFMs offer a passive range too.

She added: “DFMs will need to continue to focus on the pricing of their MPS. We expect that the new Consumer Duty regulation will extend the value assessment currently in place for funds to other parts of retail wealth management, and specifically to model portfolios."

Martin Bamford, director of client education at Informed Choice, said cost was one factor advisers “can control” when recommending a DFM, and one which is becoming increasingly important.

“There's little value in assessing past performance, but cost has a direct implication for net returns,” he continued.