How are discretionary managers really putting portfolios together?

discretionary fund managers portfoliosUnder the skin of how outsourced investment firms decide on models

One of the ways the RDR has shaped the advice industry has been to increase the trend towards outsourcing investment decisions to discretionary fund managers.

The RDR arguably made the advice process overall more time consuming, with a growing understanding of goals-based financial planning and life coaching prompting more financial advisers to delegate part of the responsibility for clients’ investment affairs to professionals so they can focus on other aspects of the job.

A 2013 study by Investec Wealth and Investment, which was carried out at the dawn of the game-changing regulatory shift, found that 47 per cent of advisers used DFMs to some extent, and that an additional 10 per cent were planning to do so in the wake of the RDR.

DFMs have seen their discretionary assets grow to occupy an increasing portion of their total managed funds. For example, in September 2012 – shortly before the RDR came to fruition – Brewin Dolphin reported £25.9bn in total funds under management and £18.2bn in discretionary funds under management. Its discretionary FUM accounted for 70 per cent of the manager’s total FUM, but that number grew to 86 per cent by March this year.

Brewin reported total fee income growth of 15 per cent in the first quarter of 2018 compared to the previous year.

Fellow DFM Charles Stanley has seen similar growth in funds from its discretionary business. In September 2012, the firm had £15.6bn in total FUM, with £5.4bn, or 35 per cent, in discretionary FUM. Five years on from the RDR, and the company’s discretionary FUM, now worth £12.3bn, makes up 52 per cent of its £23.8bn total FUM.

The 2013 Investec research found that the most common reason why advisers chose DFM portfolios was to delegate the day-to-day investment management process (89 per cent), followed by gaining access to an investment professional (82 per cent) and reducing the administrative burden (73 per cent).

A popular way of delegating the investment management process while cutting down administrative tasks is through model portfolio services. These services include portfolio construction and ongoing investment management. Portfolios are often constructed and run by the DFM’s own research teams and fund managers, but how are they actually put together?

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