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Are advisers getting the best value from DFMs?

With rising costs and an increasingly tough regulatory market more advisers are looking to outsource their investment proposition, with many leaning towards discretionary fund managers.

But while the number of advisers using DFMs is on the up, overall satisfaction with them has dipped.

According to a recent survey by financial information firm Defaqto, 74 per cent of advisers now use a DFM, up from 72 per cent last year.

The survey, which questioned 372 UK financial advisers, found that overall adviser satisfaction with DFMs has fallen by 2 per cent since last year.

Meanwhile, out of the 14 service categories examined in the survey, satisfaction levels have fallen in 10.

Defaqto insight analyst Fraser Donaldson says this should come as a warning to DFMs not to be complacent.

Donaldson says: “While satisfaction has slightly dropped off since last year it is still very high, but the figures suggest something needs to be addressed.

“As DFMs become more popular they are experiencing increased strain, which is particularly true for smaller companies.”

The biggest fall in adviser satisfaction was in quality of literature, which fell by 8 per cent.

Increasing regulation may mean there is a diversion of focus away from literature quality to literature content.

Quality of investment in staff also saw a significant drop in satisfaction, falling by 7 per cent.

This may be because there are not enough skilled candidates to fill positions due to the increasing number of DFMs targeting the adviser market.

Donaldson says: “Advisers generally expect a similar service to the one they provide when they talk to DFMs.

“A lot of discretionary managers have probably only started targeting the advice market in the last few years.

“Because it is a growing industry new people are being brought in that are inexperienced, but you would expect things to sort themselves out within a year or two.

“Discretionary managers are also having to provide more information as a result of Mifid II, so there could be some knock on effects.

“In terms of dealing with advisers it is about keeping them happy and that ranges from having accessible staff to good online access to portfolios.”

Value for money

The survey also found that 38 per cent of advisers are now running client portfolios on an advisory basis, up from 24 per cent in 2016.

This suggests an increasing number of advisers could be finding it difficult to justify fees when outsourcing to a DFM and are therefore including more advisory business.

ISJ Independent Financial Planning director Lena Patel says while she has used DFMs occasionally, she is not particularly keen on them.

She says: “I don’t want to name any names but the DFMs I have used have been expensive.

“Even with rising costs and regulation I think many advisers can cope just as well without using a DFM.

“There isn’t really a particular need for a DFM unless your client has a specific investment need or they want full active management.”

She says using a DFM can add an extra layer of unnecessary charges for clients.

“While DFMs can give advisers extra protection, if they are doing all the work there is no need for them to have an adviser charge. This weakens your link with the client depending on the DFM’s involvement.

“I’m not sure all active managers with DFMs are adding that much to portfolios. If the market takes a turn for the worse, the client may not get as much value for money.

“When I used a DFM the client’s fund dropped dramatically compared to the other three funds they were holding.”

EA Solutions adviser Minesh Patel has been using DFMs for five years. While he was initially apprehensive about them he says he is now a convert.

He says: “DFMs take the investment management responsibility away from the adviser and make it much easier to provide effective investment tax planning.

“It only takes one of your staff members to misinterpret an instruction on a big holding for your firm to be at risk.

“With Mifid II regulation DFMs have become vital and they take away the worry of compliance risk.

“But are they a necessity? It depends on the style of firm you run. If you have a big in-house team who specifically manage investments then they are probably not as essential.”

However, he points out there are some downsides.

He says: “DFMs do need to realise that the client has come from the IFA.

“When you have two specialists working with the same client role definition is very important from the outset.

“Naturally, if you are paying a bit more for a discretionary portfolio service you are expecting decent outcomes.

“If those outcomes are indifferent or worse than you could have achieved through a model portfolio, then using a DFM has to be questioned because you are ultimately paying higher fees.”

Planet 3 Wealth director Christopher Morgan says: “Despite growing regulation, we still find it easier to do work in-house, which is cheaper than using a DFM.

“As long as you embed it into your monthly calendar it is not that much work – it is what we are paid to do.

“The more alpha DFMs add, the higher the potential upside. But while they might get some big bets right, they might get some wrong.

“We will find out how much value DFMs actually add when the market takes a downturn.”



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There is one comment at the moment, we would love to hear your opinion too.

  1. Julian Stevens 18th May 2018 at 4:10 pm

    The upsurge in Multi-Manager and Multi-Asset propositions from many of the big, well-established fund management groups is likely to make it even tougher for most DFM’s to justify their proposition and charges.

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