As new regulation places increasing pressure on resources at advice firms, discretionary fund manager use has been steadily increasing in recent years.
DFMs allow advisers to outsource their manager choices, fund selection and portfolio creation. According to Nucleus, model portfolios held on platform typically range in cost from 0.25 per cent to 0.45 per cent plus VAT.
Earlier this year, a Money Marketing poll asked advisers whether DFM fees represent good value for money. Of those polled, 42 per cent argued they did not, 38 per cent believe they do, but 20 per cent remain unsure.
There is a lot to consider when choosing a DFM. The charges, range of assets and portfolios, and platform availability are some of the first factors that advisers will consider. Being on a platform creates an ease of service for advisers to be able to have all their clients’ investments in one place.
Demand for discretionary portfolios was cited as the reason for the growth in the Standard Life wrap platform’s Investment Hub for advisers. The group says market trends drove an increase of more than 30 per cent in adviser firms using its portfolios in 2017. Having portfolios such as this on a platform creates an easier route for advisers to use a DFM.
Group head of adviser and wealth manager propositions David Tiller says: “What was once the preserve of the very high net worth will be open to all advisers’ clients.”
Money Marketing has compiled data to look into the increasing use of selected DFMs and whether that has had an effect on other parts of the business. Since firms have nine months to submit their accounts for the previous year, some of the data compiled for our table (right) is for the 2016 financial year.
The table shows that assets under management at DFMs has increased across the board in the last 12 months, presenting a clear picture of growth.
Looking at the four DFMs which have available AUM results for the financial year 2017, these have increased 13.3 per cent on average. Brooks Macdonald has seen the biggest jump, up 26 per cent from £9.3bn to £11.7bn in 2017.
Last year, Defaqto’s DFM Service Review showed there was an increase in use of DFMs from 2015 to 2016. In 2015, 36 per cent of advisers used a DFM model portfolio with a discretionary manager, which increased to 50 per cent in 2016. Likewise, the number of advisers who use model portfolios through a platform increased from 42 per cent to 47 per cent.
Using a DFM for a bespoke service has also seen an increase, from 52 per cent to 63 per cent. These figures indicate the start of advisers using the full range of discretionary services available, not just the bespoke or model portfolio options.
While AUM is on the rise, so are salaries at DFMs. Data from Companies House also includes those firms that have disclosed the salaries for the highest paid directors – although this is not compulsory.
Generally speaking, salaries have increased except at Brooks Macdonald, Seven IM and Tavistock, which have all seen cuts. However, across the board the average director salary has seen a 13.5 per cent increase.
As the demand increases, the need for good service is also important. The Defaqto report also showed that service rose up the importance rankings from second to equal first with quality of investment staff. Provider brand is the least important to advisers.
Scale is not necessarily something that advisers should consider when selecting a DFM.
Whitechurch managing director Gavin Haynes says: “There is a place for small investment institutions; it is not all about scale. It is about who you know and trust, which still has a part to play in financial services and wealth management.”
Many larger scale DFMs have their own in-house products but Whitechurch does not. Haynes says the firm did look to open their own funds but decided to remain independent as a wealth manager. “It makes sense not to blur the lines,” he says.
An example of growing AUM is Charles Stanley. While it has not grown as rapidly as others, it has still seen a steady hike in assets, from £11.4bn to £12.1bn funds under management in 2017, a six per cent increase. The data for the group is specifically for the discretionary management side of the business and does not include Charles Stanley Direct, its platform.
Group head of investment management Gary Teper says: “What [DFMs] offer is the depth of investment expertise and a broader holistic offering. Our intermediary flows have more than doubled in the past 12 months.
“While we are a little behind our immediate competitors -– the likes of Brewin Dolphin, Brooks Macdonald or Quilter, which have been more focused in the space for longer – everybody in the wealth management space recognises the importance of having strong partnerships with intermediaries who are out there building their relationships with their underlying clients.”
Teper believes the obligation for advisers to provide evidence of added value is more important than ever. “These days there are significant risks when it comes to managing money and therefore it makes sense to use specialists.
“If you were to see the adviser as the general practitioner who works with the specialist consultant I think it has real merit. Using a specialist adds value.”