Investments  

Putting the world of DFMs to rights

With intermediaries increasingly segregating different clients – something now required under Mifid II rules – this at least means they can be grouped by level of assets. But an individual’s preferences still play a role.

“Every adviser is different,” noted Mr Cooper. “We have got people who have £1m-plus clients with MPS. Others have £150,000 and want bespoke.”

Robert Saunders, an adviser at Foster Denovo, agreed that while minimum investment levels for bespoke offerings were likely to rise further, some clients with relatively small sums would still prefer a premium service.

“It’s going to be [products such as] MPS from £200,000 to £500,000,” he said. “From £1m we get to direct equities and it can be bespoke. That’s the point at which a DFM starts to add value because funds tend to add costs there.

“Some people want to pay more money, which is their privilege.”

Growth areas

Developments in the DFM space reflect the client needs that have occupied intermediaries in recent years. In terms of dedicated structures, Mr Donaldson noted that Defaqto now covered 200 income-focused portfolios and 150 passive vehicles.

Another growth area has come in the form of ethical offerings. Defaqto covers nearly 100 portfolios with this focus, though many are run by one provider, Parmenion. But questions remain over whether such products have gathered sufficient momentum just yet. The current state of progress here can be seen in the fund space. Ethical funds held nearly £16bn of assets in April, but this only represented 1.3 per cent of the industry total, and is only slightly higher than the 1.2 per cent share recorded in 2008.

The event also addressed the behaviour of intermediaries when it comes to assuming, or outsourcing, investment responsibilities, and the arguments for and against using a DFM.

Outsourced investment propositions enjoyed significant growth in the wake of RDR implementation, but more recently there have been signs of a slowdown. The establishment of industry body DFM Alliance by five of the biggest discretionary names last year, aimed at pitching the benefits of outsourcing to intermediaries, was viewed in some quarters as a sign that growth has less momentum than it once did.

Similarly, there have been suggestions of advisers assuming discretionary responsibilities themselves. This could be a way of justifying adviser fees, cutting charges for the end client, or even preparing a business for sale.

“People looking to sell in a few years’ time will want to take the investment business back in-house, because that’s where the money is,” explained Mr Saunders.

Wake-up call

In its latest DFM service review, Defaqto found the proportion of respondents using advisory portfolios had jumped from 24 per cent in 2016 to 38 per cent in 2017, at the expense of discretionary offerings, and described this as a “wake-up call” for investment specialists.