There’s been a seismic shift among advisers towards outsourcing the investment management part of their financial advice process. The main beneficiaries have been discretionary fund managers.
Financial advisers have long held ambivalent views of DFMs. Many advisers have always struggled to see what value a DFM would add to their clients’ investment performance and still prefer to run portfolios in‑house. Other advisers have historical relationships with DFMs going back many years and praise the value outsourcing investment services can add, creating greater efficiencies in the financial planning process.
RDR had a lot to do with the change. In a commission-free world, advisers have much less of a vested interest in fund picking and manager selection. Instead, many advisers now seek to justify their own charges by outsourcing the investment process and focusing on tax and financial planning – the areas in which financial advisers can probably add most value.
Platforms are the main recipient of flows – as with most advised investments – and many DFMs now see this as their primary route to market. Most of the money is going into model portfolios rather than DFMs’ bespoke services. We know this because at Platforum we’ve been tracking assets in DFM models on platforms for several years.
It is not just that more adviser firms are choosing to outsource their investment function to DFMs. The growth in DFM assets under management has also been driven by clients topping up their existing DFM portfolios and adviser firms that are already outsourcing moving more and more client assets to their chosen DFMs.
The in-house advisory portfolio still garners the lion’s share of advised assets, but many advisers tell us the advisory model becomes increasingly difficult to run as client numbers and assets grow. Problems arise with the administration of switches and rebalances, while retaining consistency across the models so that clients stay within their risk profiles. However, some of the administrative burden could be eased by developments in technology like Intelliflo’s new integrated model portfolio solutions facility.
We have looked at the key factors outsourcing advisers consider when they select a DFM partner and assess their existing DFM relationships. We surveyed 193 advisers to tell us the top three factors they consider.
It comes as no surprise fees and charges and investment performance remain top of advisers’ lists, even though they are finding it harder and harder to differentiate between DFMs on these criteria.
More advisers tell us they require DFMs to be available on their preferred platform. Advisers are reluctant to switch clients from platform to platform and so DFM choice is often limited to those readily available to advisers on their current platforms. DFMs can often onboard their portfolios onto a specific platform if there is enough client demand, but some platforms are more responsive than others to such requests.
Interestingly, client service has dropped significantly as a key selection factor from previous years. Outsourcing advisers still want to manage the client relationship. DFMs are well aware of this and recognise that a key point of differentiation in their service is providing advisers with all the reporting and information they need to manage these client relationships.
Some DFMs have begun to explore white-labelling opportunities that allow advisers to slap their firms’ names and logos onto model portfolio ranges and report, keeping the DFMs themselves firmly in the background.
The evolution of the financial adviser into the financial planner has created something of a boom time for DFMs and their ranges of model portfolios. The DFMs who best support advisers in managing their client relationships will ultimately be the ones which succeed.
Andrew Ashwood is a Senior Analyst at Platforum. For more information on Platforum’s latest report, DFM Distribution Dynamics, contact email@example.com.