Rathbones uncovers difference third-party investment managers can make to financial planning
We are all well aware of how the world of discretionary fund management has boomed over the past decade, but very little is known about the value or impact the outsourced model has had on advisers themselves. This is something the first Rathbones Value of DFM report has set out to rectify.
Anecdotal evidence from advisers suggests the need to protect profitability, to react faster to market volatility and to improve client service are among the key reasons for adopting a DFM but, aside from big picture data, concrete facts about the effect it is having are almost non-existent.
This glaring gap in what we consider to be essential knowledge is something that needs to be addressed given the estimated 40 to 50 per cent of the industry that has already outsourced to a DFM, a proportion that is expected to swell to around 60 to 70 per cent of the adviser population over the next few years.
To combat this black hole in research, Rathbones teamed up with independent financial services research consultancy CoreData and anonymously surveyed 100 advisers – both those who had embraced DFMs and those who had not made the switch. The result is a reasonably comprehensive report into the impact of the DFM model on the UK’s advisers.
We hoped to shine a light on the real drivers of the shift to DFM and the impact it has had on advisers who have outsourced, and the results have revealed some striking differences between what we have dubbed “users” and “non-users”.
From the RDR to Mifid II, regulation is often pointed to as the catalyst for change in our industry, and you might presume that the persistent push of regulators is the biggest factor driving the rise of DFM use among advisers. But the survey revealed a more complex picture. Around 15 per cent of advisers said that regulation was the main reason for their switch to using a DFM, with one respondent going so far as to say the costs of even the smallest fund switch made running client investment themselves “completely non-viable from a cost perspective”.
However, a far more significant reason cited by 41 per cent of those surveyed was a “strategic review” of the business, suggesting de-risking, increasing levels of compliance and evolving the firm’s offering were overall bigger factors than simply regulation alone.
Other reasons for outsourcing included organisational change, cited by 18 per cent of advisers, and a “market event”, which was reported by 5 per cent of them.
Promisingly, the clear majority who have adopted a DFM seem to have found the process relatively painless, with 76 per cent disagreeing with a statement that it was “difficult to introduce” third-party investment managers into their business.
The plethora of headwinds pushing advisers towards a DFM solution is a clear sign of the seismic shift affecting financial services and while we know it is a growing trend, what has not been looked at is if advisers are any better or worse off after taking the leap.
What is the real impact?
The survey delved deeper into the real impact DFM use has had and the responses revealed a growing gap between users and non-users regarding client numbers, time management, revenue and even adviser salaries.
It was in client numbers and revenues that some of the starkest differences appeared. In firms that had adopted DFMs, they reported 14 per cent more clients per adviser than non-users and revenues that were around 18 per cent higher at £220,716 per adviser versus £186,606 in companies without outsourced support.
As you would expect, adopters of DFM services tended to be larger organisations and the survey confirmed firms using it were, on average, double the size of non-users.
More than half of users (54 per cent) also reported a marked increase in client bank numbers since adoption and were found to be able to charge around £10 more per hour for reviews.
Crucially, adoption of a DFM does appear to do exactly what it is supposed to – free up adviser time to spend with clients, generate new business and reduce the time advisers spend on managing their client investments.
As a result, DFM users spend considerably more time on activities that generate revenue, such as meeting with clients, than their counterparts, with 25 per cent of users saying they spent time on this each week against 19 per cent of non-users. “Managing existing clients” was named as a key revenue opportunity for users far more than it was for non-users.
A positive by-product for advisers is the impact outsourcing to a DFM has had on their salaries.
The survey found 12 per cent of advisers had seen their pay shoot 20 per cent higher, 6 per cent said it had jumped by 15 per cent to 19 per cent, and 8 per cent reported a rise of between 11 per cent and 14 per cent post-adoption. Numbers not to be sniffed at.
For the first time, we have clear evidence of the positive changes that come with adopting a DFM. But some industry naysayers are yet to be convinced.
They list costs and maintaining client relationships as reasons not to outsource investment management, with 5 per cent of advisers who had not adopted a DFM fearing it would “steal” their clients from them.
A smaller proportion (4 per cent) were worried they would lose control of the investment value chain.
A significant 71 per cent of non-users listed a cost concern as a reason against DFM adoption, with some arguing the costs of DFM were too great and others feeling they would “struggle to justify the cost of their own advice”.
The DFM sector must not give up hope, however, of converting some of these mindsets, with only 18 per cent of non-user advisers claiming nothing would change their position.
For non-users still sitting on the fence, lower costs and an improved performance might help sway them, according to the survey.
Transparency and a wider availability of products were also factors that came up time and again.
These improvements tally with the things looked for the most by advisers when searching for a suitable DFM.
Performance is by far the most important factor, according to the survey, and was listed by 81 per cent of advisers, with costs cited by 75 per cent. The investment process and the ability to personalise the service also featured highly.
Still work to be done
As with many areas of financial services, there is room for improvement in the DFM space and the criticisms are not baseless.
What this report can provide is the information needed to further improve the offering for advisers by focusing efforts on areas such as performance, value for money, transparency and tailoring investment solutions for more specific client needs.
What is vital is that factors such as costs and performance, listed as key issues when looking for DFM support by some non-users, are not used to judge an offering in isolation and end up putting value for the end client at risk.
It is clear there is still work to be done and we have only just started to examine the impact DFMs have on advisers in any great depth.
The Value of DFM report is now available for everyone to read and, hopefully, discover more about the real impact the outsourced investment model has had on advisers so far.
Mike Webb is chief executive of Rathbone Unit Trust Management
The full report can be seen here: www.rathbones.com/value-discretionary-fund-management
Survey findings: In numbers
The difference in number of clients per adviser between users (172) and non-users (151)
The revenue difference between users and non-users (£220,716 and £186,606 respectively)
Users are able to charge more per hour for reviews, achieving £206.40 against £196.40
Cost and performance: Rathbones’ view
“While it is right to focus on costs this must not risk value for clients. This report shows that focus on securing low costs alone means clients could lost out on the expertise DFMs offer, and advisers may fail to achieve full value for their clients. Similarly, it is important that performance is seen as a plot point in a client’s investment strategy rather than an absolute. Other factors such as the assets used, the level of risk and the amount of personalisation should be taken into account.”