The market for discretionary fund managers is becoming more and more competitive, both for businesses offering model portfolios and those with more bespoke offerings.
At the start of March, within the space of one day we saw Quilter add 40 model portfolios to their MPS service, and perhaps more surprisingly, Octopus decided to close its own DFM service. Any adviser wanting to recommend a DFM will have a wide and evolving range of options to choose from.
Advisers have been using DFMs for a number of years, but over recent times this usage has increased. In part this reflects a successful advice sector.
Businesses have been growing and reaching the point where their investment propositions can benefit from external help and expertise. It is also perhaps fair to say that the wide range of options to choose from has led to an overall improvement in quality – there are many well established DFMs with good reputations, solely focussed on managing client money safely and effectively.
This focus point is important. It allows advice companies to focus on their own strengths: financial planning. It is also, perhaps, the reason for Octopus, a large successful group with their focus elsewhere, to exit the market.
If an advice business is considering working with a DFM it is likely to be a big step. Entrusting the reputation of the company, and more importantly, their client’s financial lives with a third party is not something to be taken lightly. One of the most important aspects of selecting a DFM partner is to be clear on what the drivers are for outsourcing.
Regulation and expertise
We find it tends to come down to two main reasons.
Firstly, we are increasingly hearing that centralised investment portfolios are becoming more and more difficult for businesses to manage. As a business grows in size, adding more clients and more advisers, there is a danger that the CIP ends up with an ever-increasing number of portfolios.
This is especially the case if you run portfolios on an advisory basis and need to obtain individual client authorisations each and every time the portfolio is rebalanced or changed. With clients responding to authorisation requests at different times, and sometimes not at all, this requirement inevitably results in the creation of multiple versions of the same model. This in turn increases the operational pain of reporting on and monitoring the portfolios.
Mifid II has made this problem even harder, with increased requirements for reporting and disclosure. Now, as well as obtaining investor authorisations, businesses must also make a personalised suitability assessment and issue pre/post-trade cost and charges disclosures. For many businesses, especially larger ones, the requirements of Mifid II have made their CIP almost unmanageable.
Secondly, there is the question of expertise. As advice firms become more confident in their own proposition, we are seeing an increased trend for a clear delineation of roles, designed to give clients an improved overall outcome.
