The plethora of different ways advisers have to invest their clients’ assets never ceases to amaze me.
From single-strategy funds, to multi-asset, multi-manager, advisory, discretionary, and bespoke models, with in-house or outsourced arrangements, there are myriad ways to cut the investment cake. I’m pretty agnostic as to how you cut it, but we at Money Marketing have been particularly keen to get a better idea of why advisers do – or do not – outsource to discretionary fund managers.
There are a number of concerns advisers have flagged that sit behind their decision not to use a DFM: they only work for high-value clients, it adds another layer of charges, or it takes away from revenue and risks losing control over the relationship.
It is this last objection that we have decided to explore this week. How much credence should we put behind the idea that a DFM could potentially poach an adviser’s client?
Well, a surprising number of DFMs operate in-house advice operations of their own, or have stakes in adviser technology, platforms or support service operations.
We tried to get an idea of the total assets and proportion of flows coming from these in-house avenues. While they are obviously not a proxy for the number of clients poached, they are useful figures when thinking about the size of the incentive other parts of the value chain owned by DFMs would have to take more control of an external adviser’s client relationship.
While some DFMs see significant flows coming from clients under their own agency, others do not, or have specific policies to prevent the perception of poaching. Naturally, it is in the interests of DFMs to defend themselves against accusations of poaching to woo advisers considering taking the plunge, but who remain cautious about handing over investment responsibility.
But most experts will also tell you advisers’ fears that clients will get poached by a DFM’s own planners or platform tend to be overblown.
If DFMs have an in-house advice arm, they must be wary of shoehorning concerns and how they conduct replacement business after FCA reviews into suitability and consolidation.
Personally, I think that as the DFM arena becomes increasingly popular, it will become increasingly competitive too, with more advisers taking a deeper look across the market for the best deal. Service levels – and boundaries as to who does what with advised clients – will be crucial to winning this battle. DFMs who go above advisers’ heads would be foolish in the extreme to get caught taking over agency, or key parts of it, without explicit consent, lest their reputation be crushed.
Still, it is up to the DFMs to prove the doubters wrong, as even isolated incidences could tar the sector and put the brakes on the current trends towards investment outsourcing.
Money Marketing’s expert panel will take a deep dive into DFM issues at our flagship conference next month. Advisers can join over 300 of their peers and register for their free place at https://mmi.moneymarketing.co.uk/london/attending/register
Justin Cash is editor of Money Marketing. Follow him on Twitter @Justin_Cash_1