To retain the business, DFMs are expected to be more proactive in servicing the adviser and respond rapidly to their demands. Reporting and attribution analysis from the DFM is more detailed, more relevant and more adviser-friendly.
Different types of DFM suit different advisers and their clients. There are those who are well established and with long pedigrees; typically the big clearing banks, insurance companies and fund management houses. However they may also be impersonal, with high staff turnover and subject to restructuring. Worse, they may try to cross-sell other services direct to the underlying clients.
Regional stockbrokers often offer dealing and custody as well as advisory and discretionary management. On the plus side is local access and personal service, but there may be no central disciplined process for managing portfolios that may rely on the whims of one individual. Centralised control of risk mandates within DFMs is not universally available. Periodic mergers, acquisitions or restructuring can mean high staff turnover and changes to systems and service levels.
Boutique fund houses portray themselves as not following the herd, and offering potential outperformance. Rather like designer clothes, they may not be cheap and seek to attract high net-worth and ultra-high net-worth accounts.
Medium-sized DFMs have tended to service financial advisers and other professional referrers, but may also have their own solid base of direct private clients. Some may only offer unitised solutions.
However even the traditional offerings are evolving. Advisers will want to know that the risk profile of the portfolio matches the needs of the client, not just at outset but throughout the lifetime of the arrangement with the DFM.
In addition to these requirements financial advisers typically ask us about agreements to prohibit cross-selling. This makes good sense. A DFM setting up shop in the same town as a financial adviser may be perceived as a threat to the adviser. After all an adviser does not want to refer business to a DFM which is simply building up business at the expense of his own.
Beyond the traditional bespoke work, DFMs now provide much more to IFAs. Model portfolios are a mainstay for many advisers. Whether active or passive they offer the adviser control of risk profile and critically remove some of the ‘legwork’. An advisory process that requires clients to sign pieces of paper every time portfolios need to be rebalanced is going out of fashion.
Unitised offerings are also popular for advisers who want to minimise tax liability. The switching of holdings within a typical unitised offering means there is no capital gains tax on disposals. Advisers will typically need to consider whether the potential extra cost of a unit trust wrapper is worth the savings in tax. For many advisers, perhaps, the familiarity of many unitised fund-of-funds is the main attraction and gives them the feeling of being more hands-on.
