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Chris Gilchrist: Where is the value in outsourcing to DFMs?


Representatives of discretionary fund managers are wearing out a lot of shoe leather as they criss-cross the country bludgeoning advisers with presentations on risk control processes, ARC data and Distribution Technology ratings for their model portfolios.

Presenters at Defaqto’s investment outsourcing conference last October queued up to present the post-RDR world as a great opportunity for advisers and DFMs.

DFMs hope that as advisers adopt structured centralised investment propositions and realise how much work is involved in managing a Cip, they will see how much better off they would be passing the problem onto someone else.

I think they are being over-optimistic.

First, advisers will always be on the hook for the assessment of the client’s risk tolerance/capacity unless they introduce the client to a full-service DFM, in which case they are no longer the adviser’s client, at least as regards their investments, in any meaningful sense. Second, I hear of more medium-sized adviser firms seeking discretionary permissions. If you have enough assets, then if you set the extra costs against the DFM fee you can probably make a reasonable profit on a DFM service.

Third, the alternative to traditional DFM – DFM model portfolios on wraps – is highly flexible, fits within most business models and leaves the adviser completely in control of the client relationship. But then the adviser has to ask what these model portfolios deliver to their clients that multi-manager or multi-asset fund ranges with the now conventional risk-channelled profiles do not. Since DFMs cannot (on most platforms) include the smarter stuff in model portfolios, you can argue that multi-asset funds (some of which are unitised DFM) are a better solution. They enable managers to use derivatives to control risk in a way that model portfolios cannot, or can only do more cumbersomely.

Fourth, insourcing solutions for advisers are out there in increasing numbers and creating a Cip is getting easier, at least on paper. Actually doing it, if you are an adviser running your own model fund portfolios, is not that easy but my guess is a lot of advisers will have a go, partly because they have made talking about funds a key part of their investment proposition.

As for the DFM offerings, I struggle to see why any adviser would adopt an old-model DFM with multiple offices and managers, where a semi-centralised portfolio is tweaked at local level.

I accept this model is so venerable it features in the Forsyte saga but I cannot help feeling that is where it belongs. If you are using discretionary management because of the FCA’s insistence on consistency, why would you use a DFM, whose own process is unlikely to be consistent? Perhaps I just lack enthusiasm for oak panelling and name-dropping. I can see arguments for the use of modern, largely model-based DFMs in some areas. And for some client categories – trusts, minors, the risk-averse – there are definite benefits for the adviser.

The unitised DFM ranges of five to seven multi-asset Oeics look better in terms of efficiency and value for money the more I look at them. I can just about see how an adviser could shape a business around use of such services. But there are still many old-model DFM dinosaurs that deserve extinction and too many new-kid-on-the-block solutions puffing the same old modern portfolio theory nonsense.

Chris Gilchrist is director of Fiveways Financial Planning, a contributing author to Taxbriefs Advantage and edits The IRS Report


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There are 2 comments at the moment, we would love to hear your opinion too.

  1. Given the choice between a collective fund with all the standard reporting, benefits of scale, regulatory structure, tax advantages (outside an ISA or Pension), and almost clear charging structure I fail to see why anyone would use a DFM where none of the above apply, in fact I would go further and ask why such stalwarts of the Investment Trust world such as Scottish and Mortgage are not being used more given their very long track record, their ability to twist and turn with the long term trends of the markets and their long established and extensive management teams.

  2. I think you’ve summed this up pretty well Chris. I once remarked to the Parmenion team that if their solutions were so good, why not simply OEIC them and ‘get on with it?’. I suspect its not as profitable!!

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