In an RDR-compliant world the benefits of a discretionary fund management service are accentuated and advisers should see this as an opportunity to examine the best way to manage client assets.
Many advisers already use DFM services. An annual adviser study found that 47 per cent of respondents now have at least one DFM relationship. The research found that the average proportion of client funds outsourced by advisers who use DFMs increased from 28 per cent in 2011 to 34 per cent in 2012.
A quarter of the advisers surveyed said they outsource more than half of their clients’ portfolios to a DFM for bespoke investment management, an increase from 22 per cent last year. The average number of DFMs used by advisers had also increased from two to, on average, two and a half.
Increasing use of DFMs is to be welcomed but there are clearly large numbers of intermediaries yet to consider the rationale behind outsourcing. There remain a number of misconceptions about using a DFM provider and it is important to address these fully.
Some advisers fear that DFMs will poach their clients but the reality is that DFMs work closely with the adviser and together offer their clients an enhanced, value-added service. Others are concerned that the relationship with their clients will be weakened by introducing a DFM but in contrast clients are found to fully appreciate the adviser’s expertise and value their ability to bring in a specialist investment partner.
Another refrain is that a DFM service is expensive. Again the reality is that a DFM provider can construct a broadly-based segregated portfolio, including asset classes and stocks that are suitable to the client, with a total cost which is not dissimilar to an off-the-shelf pooled or collective approach.
Finally platforms are viewed by some advisers as a panacea to challenges around DFMs, providing them with the only cost-effective medium through which they can aggregate assets, gather revenue and receive comprehensive reporting. While a very important option and an effective proposition, platforms are not appropriate for all clients. DFMs offer a more sophisticated service.
According to the study, the most important criteria cited by intermediaries working with a DFM are quality of service (by 92 per cent of respondents), investment performance (92 per cent), a high quality relationship (89 per cent) and transparency around charges (85 per cent).
It was not surprising to see investment performance and service quality at the top of the list. The primary purpose of a DFM is to offer a strong investment management service for advisers, maximising opportunities and working with them to provide a richer, more in-depth service than they might be able to offer by themselves.
Reputable DFMs concentrate on portfolio management, ensuring client assets remains at all times appropriate to each client’s unique set of circumstances and needs. The adviser can reduce the potential for poor portfolio performance due to inactive or inappropriate asset allocation.
Well-run portfolios must evolve to reflect changing economic and market conditions and a professional investment manager is best placed to capitalise on these and act on market timings. A professional investment manager will usually also allow client portfolios to include asset classes or individual stocks that are difficult for a financial adviser to access directly.
