DFM decision time: How satisfied are advisers with their outsourced managers?

MM’s survey gets to the bottom of how advisers use their DFMs and how satisfaction levels have changed in the past 12 months

Adviser satisfaction with discretionary fund management partners has improved in the past 12 months, new research from Money Marketing suggests, with more advisers adding to their panels or increasing the proportion of client assets in discretionary mandates.

Our annual DFM Satisfaction Survey saw 275 advisers and paraplanners weigh in this year on how they use DFMs, the charges they pay, and what they are really looking for in their outsourced investment manager.

Twenty per cent of respondents said they use one DFM. Nearly a quarter use two, while another 20 per cent use three DFMs.

Twelve per cent of advisers use five or more DFMs – though advisers note that this may include legacy relationships with clients or advisers they have taken on and must continue to service, rather than having a large number of DFMs as part of the firm’s core proposition. Sixteen per cent of respondents did not use a DFM.

Eighteen per cent of respondents said they had added to the number of DFMs they use in the past year – twice the proportion that said they had reduced their panel – while 74 per cent said the number of DFMs they use had remained the same.

Brewin Dolphin, Quilter Cheviot and Parmenion topped the list of most commonly cited providers to use as a primary DFM.

Nine per cent of advisers put at least 90 per cent of their assets with their DFMs. The majority put at least 40 per cent of their firm’s assets with DFMs.

A quarter of advisers pay between 0.3 and 0.4 per cent to access their DFMs. Eighteen per cent pay between 0.4 and 0.6 per cent, 21 per cent pay between 0.7 and 0.8 per cent, and 20 per cent pay above 0.9 per cent.

Compared to when Money Marketing ran the survey last year, average fees seem to have remained flat, with a slight drop from 0.66 per cent to 0.63 per cent.

Adviser view

Kevin Forbes, managing director, Strategic Solutions

That some advisers appear to use five DFMs does seem like a lot given we know that 9 per cent of firms have less than five advisers in them. With 20 to 30 advisers, you can see how you would historically come by relationships that build up. The risk mapping would get very difficult though – almost as much work as doing it yourself. A balanced investor would be different across each.

What we have found is that most of the DFMs have started managing their own risk rather than managing client risk. They don’t want to be caught out on £25bn assets under management. Not in a greedy way, but some of them are very expensive models.

Advisers were asked to rate how important they thought a number of factors were when selecting a DFM, from brand reputation, to manager selection, cost, investment choice, performance and service levels, out of a maximum of 10.

Service levels were rated most important, with an average score of 8.17 out of 10, followed by performance at 8.09 out of 10. Brand reputation was scored lowest in importance, at 6.29 out of 10, with manager selection the next lowest scorer, at 6.79.

On a scale of one to 10, a quarter of advisers scored their DFM a 10 in terms of how satisfied they were with their current relationship with them.

Another quarter scored it a nine, and 20 per cent scored it an eight. Only around 10 per cent rated their satisfaction as five or lower.

When it came to how that satisfaction had changed over the past 12 months, 16 per cent said they had become more satisfied with their DFM, compared to 7 per cent who were less satisfied. Four per cent said they were “considerably more satisfied”, 3 per cent “considerably less satisfied”, with the remainder rating their satisfaction as unchanged.

On the positive side, some advisers were more satisfied because their “working relationship has got closer” or reported “better service levels” from their outsourced manager.

Others reported specific improvements to the way investments were managed. For example, one adviser said their DFM “has listened to feedback about the investment strategy, as it was felt to be too cautious across the range and as such has changed the mandate”.

Another noted “better diversification and introduction of more uncorrelated assets for better risk mitigation and opportunity seeking”, and several applauded the communications from their DFMs around Mifid II regulations.

One adviser said: “Most DFMs just bunch together a suite of multi-asset managers. Any worthwhile, qualified investment adviser should be able to do that. We believe that a DFM’s responsibility should go beyond that.”

However, issues still remain for many advisers.

Some noted problems such as “internal management changes occurring too often” and “no costs and charges transparency”.

One adviser wrote: “[The DFM] is not very responsive to phone calls or emails when you have a query. If you query charges you don’t get the full response – it could be a lot better. It will prompt us now to do an earlier than due round of DFM due diligence for a panel.”

Expert view

The benefits of a DFM panel

Graham Harrison, managing director, ARC Research Limited

The results of the annual Money Marketing DFM Satisfaction Survey revealed that 80 per cent of advisers utilise more than one DFM and around one in six advisers had relationships with four or more DFMs. Also, there was a modest trend towards increasing the number of DFM relationships.

So is there any evidence that there are benefits for advisers in using a DFM, and does it make sense to have a panel of DFMs rather than relying on a single provider?

The job of a DFM is to create and manage what economist Harry Markowitz described as a “good portfolio” – a mix of asset classes and components that provide protection and opportunities with respect to a wide range of potential outcomes.

Using the ARC universe of over 130,000 underlying private client portfolios run by around 90 DFMs, the evidence suggests that, on average, over the past five years DFMs have delivered superior risk-adjusted performance to their multi-asset class fund peers. That is encouraging and suggests DFMs can balance risk and reward for clients.

However, not all DFMs are equally skilled in all market conditions. It therefore makes sense for advisers to operate a DFM panel where clients can select the DFM that best fits their preferred style.

It is encouraging that, on average, the majority of their advisers are satisfied with their DFMs. However, it is unlikely that any single DFM will suit all of an adviser’s clients.

The evidence from the survey is that most advisers have realised there are significant benefits in providing their clients with a choice of DFMs rather than a one-DFM-fits-all solution.

Another theme to emerge is several advisers noting how important truly bespoke management was for them, expressing concern that “the level of
tailoring/personalisation has decreased over many years and continues to do so”.

Performance did not seem to feature so prominently in the feedback around satisfaction.

While one respondent commented that they were “a little disappointed” with DFMs’ performance during volatile markets in the fourth quarter of 2018, “their stance of generally not panicking during the period has to be applauded and respected”.

Reducing costs was something that many advisers said they would like to see from DFMs to improve their relationship with advisers, as well as better transparency of those costs.

One adviser said: “It’s a race to zero and there is still the opportunity to capture a bit of market share and build a decent-sized business with a genuinely good value proposition before virtually all investors go down the self-invest or robo-advice route in the coming decade or so.”

“Charging in a clearly identifiable way would help as no two seem to present their figures in the same way so direct comparisons are difficult,” another adviser noted.

“Standardised projections of costs would also be helpful as at present the return rates used to provide Mifid II charges reporting are all over the place.”

Other more technical points for improvement included processing of online applications and online reporting facilities.

Advisers also called on platforms to do more to help DFMs in terms of both investment management and reporting.

One wrote: “Force platforms into being able to effectively deal with Mifid II issues, particularly in respect to the 10 per cent quarterly reporting.

“Platforms seem to like taking on the client, but then cannot provide the DFMs with the relevant information to report accordingly, which means it is being fobbed off on us.”

Overall it seems, provided service levels have not dropped, advisers still value DFM relationships highly though.

One wrote: “DFMs are the right solution for high-net-worth clients. They offer those clients with large investible assets security in the triangulated relationship where the DFM offers advice on investments using the firm’s research and analysis tools, and the adviser (me) offers more holistic tax and financial planning in accumulating and accessing the asset.

“These clients feel more secure having a ‘professional’ fund manager dealing with the investment decisions regarding the assets directly.”

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