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Tatton boss: ‘Creating a DFM doesn’t happen overnight’

Tatton’s chief executive Paul Hogarth on the future of the outsourcing investment

Hogarth-Paul-CEO-Tatton-Asset-ManagementAmid the handful of IPOs to pepper the advice space over the past few years, one name may still be unfamiliar to advisers: Tatton Asset Management.

But while the Tatton brand may not yet resonate, the name Paradigm may ring a bell, as one of the longest- standing support service providers for IFAs.
Tatton Asset Management split into three subsidiaries when it listed last year: Tatton Investment Management for discretionary fund management services; Paradigm Partners for support services and Paradigm Mortgage Services for mortgage advice.

Tatton’s maiden results since the float last week paint a picture of a significant new entrant to the vertically integrated space for advisers – though Tatton does consider itself vertically integrated because it does not provide advice itself. Though profits are not exactly blockbuster at £3.6m, they are a significant jump on the £2m in 2017, and would have been £3m higher again without the costs of the IPO and share options.

Discretionary assets were up by more than a quarter and have now passed the £5bn mark. This puts Tatton in line with the likes of Openwork’s in-house Omnis range, and is around double what is managed by St James’ Place-owned DFM Rowan Dartington – though it considers its key competitors to be DFMs that only sell to external advisers such as Vestra Wealth.

“The main reason for the IPO was profile,” Tatton chief executive Paul Hogarth tells Money Marketing after the results, noting that the float also made Tatton’s DFM an easier sell to advisers because the due diligence was in the market already.

In the wake of Mifid II cost disclosure requirements and pressure on fees more generally, Hogarth is looking to cash in on trends towards outsourcing investment.

In the results statement, Tatton says: “The increased complication of managing and operating as a financial adviser is further compounded by the complexity in the provision of financial advice and financial advisers’ ability to provide their clients with an understanding of their investment options based on their risk tolerance.

This, in practical terms is burdened, by the construction, monitoring and rebalancing of investment portfolios – brought into focus by the regulatory requirement of investors both large and small to achieve comparable outcomes and received service.

“Financial advisers are increasingly seeing investment fulfilment as non-core and expensive due to the cost, regulatory exposure and professional commitment to offer their clients high levels of holistic financial advice and service rather than investment management.”

There remains a debate over how many advisers will follow a nacent trend towards outsourcing their investment. Research from Platforum suggests that around 16 per cent of advice firms currently have discretionary permissions, mostly larger firms, and 11 per cent of firms plan to get them in the next five years – so we are already more than half way there.

However, Hogarth does not believe that a flood of new competition will be able to replicate Tatton’s mass-affluent focused model and steal whatever market share there is left.

“[Building a DFM] doesn’t happen overnight,” he says, adding that the cost of the Tatton proposition, which is offered as low as 15 basis points, “is a very difficult thing for people to come into the market with”.

But how will the group juggle any potential conflicts of interest that comes from selling support services to advisers and then asking them to opt for its investment solutions over the wider market?

While the firm argues that selling support services and investment solutions is not the same as a DFM owning the advisers, of the 340 firms using Tatton, around half are Paradigm firms.

Hogarth says this is in “tapering mode”, however, as the business looks to focus on pitching the Tatton DFM to the wider advice market.

Asked if he would ever consider splitting the group to either allay any potential conflicts or concentrate on the higher margin areas of the business (though Tatton Investment Management contributed less to profit than Paradigm Partners, at
£3m to £3.6m, it doubled its profit margin between 2017 and 2018 and grew revenue at a faster rate), Hogarth says: “I don’t see why you would ever want to do that.”

“The important piece for the Paradigm relationship is the intelligence from Paradigm financial advisers. If we keep close we understand what they need.”

The next step in the evolution is likely deciding on how to spend the £10m in cash that the firm has decided to sit on since the IPO. One hint came through the results statement, where Tatton said it would, “through carefully selected acquisitions, seek to strengthen and deepen our service proposition and expertise where appropriate.”

Hogarth says the cash is more likely to be used for a series of smaller acquisitions rather than one large one, but the board has yet to decide a firm strategy. “When it comes to mergers and acquisitions, it’s about getting to the point where we will work out what it is,” he says.

“We’ve been very much focused on organic growth, but we are looking at all sorts of options.”

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