The relationship between financial advisers and discretionary fund management (DFM) providers should be strong – but unfortunately there are trust issues.
Many advisers turn to DFMs for investment management services and to make sure client money is invested in portfolios that match their customers’ needs and risk profiles.
But, there has been a general fear that outsourcing such services could mean clients would just bypass their advisers and go straight to the DFMs themselves.
Industry players have told International Adviser that financial advisers have no reason to be concerned about this. Why? Because the two parties play very vital roles within the management of investors’ wealth which neither can replicate.
While DFMs specialise in investing client funds, advisers offer a different layer of service, one that takes wealth creation and preservation processes to the next level. Without financial, tax and estate planning, client investments would lack an overall strategy.
At the same time, clients cannot have a financial plan without sound investment management to help them reach retirement targets and life goals.
Cost and control
Paul Surguy, managing director – head of investment management & proposition at Kingswood, believes some myths around discretionary fund managers need to be busted.
He said: “Cost is often the most frequent objection. But DFMs are not as expensive as some often assume. Their charges generally start from 0.4% per annum plus investment costs.
“So, what do you get for this? A DFM service will see your client’s portfolio managed by a team of experts who will choose all of the investments and run a risk profiled portfolio appropriate for your client.
“The client benefits from being able to access the latest trends in investment thinking such as ESG, and also have access to investment products that would otherwise only be available to institutional level investors. In the event of a significant market event, a DFM can react and make appropriate changes to client portfolios instantly.”
He added that using a DFM won’t mean losing control of your clients.
Surguy said: “The investment management portion of managing a client’s wealth is only one part of the relationship. When an adviser outsources the investment management to a DFM there might be a worry about losing control of the client or, even worse, the DFM partner attempting to steal the client.
“When selecting a DFM or range of DFMs, ensure that they are credible partners or partners willing to work with you. Any credible DFM will have their long-term credibility at stake and will not want to jeopardise that by hiving off clients. From Kingswood’s perspective, the financial adviser is absolutely in the driving seat on this and the choice of who is able to contact the client sits with the adviser.”
According to Richard Bacon, head of sales and business development at Shard Capital, this fear is completely unfounded, especially because DFMs are not even remotely concerned with having a dialogue with the end investor nor they want to be aware of what their circumstances may be, that is for the adviser to know.
Bacon said: “Customers’ personal circumstances are, in the main, irrelevant. The DFMs are now providing a service to IFAs more than the end consumer, and therefore advisers no longer have anything to fear. There are exceptions of course, but there has been a clear shift in business model from the national providers of DFM services.”
Wealth size, switching and added value
Surguy said that another myth that needs to be busted is that some clients may not be wealthy enough to have their funds managed by a DFM.
He added: “Not all DFMs will offer services to clients across all portfolio sizes, although many, including ourselves, have a range of products and services starting from £50,000 ($68,000, €60,000), it is always worth asking the question. Most investors start small, the key to keeping them as clients is growing their wealth in a measured fashion, enabling them to get on with their day to day lives.”
Surguy also said that is the belief that it will be difficult, if not impossible, to switch providers.
He said: “There will still be some players in the market that try and hold clients in, mainly through punitive exit charges. This is something that can easily be set out at the start of the relationship, ensuring that your client can leave, penalty free. Most decent DFMs will have these arrangements in place as standard.”
Lastly, Surguy said advisers need to know that DFMs give them time to do other parts of their crucial job.
“DFMs work alongside advisers leaving you time to focus on the most value-added part of your service, which is undoubtedly financial planning,” he added. “Or in other words, helping clients to have a clear picture of where they are today, and the optimal moves to get the financial future that they desire.
“Good investment management which serves these aims is invaluable, but it can be handled by a trusted partner, leaving you free to continue to grow the number of clients that you can serve. Clients expect that their investments will be actively monitored and managed all the time, this is the role of a DFM who is entirely focused on what is coming next and where client assets are best positioned to benefit.”
Change in demands?
The last couple of years have undoubtedly seen a shift in the way clients and investors interact with their advisers and providers by having a more active role in the relationship.
But have customer needs and requests changed when it comes to DFM services as a result?
Mark Leale, head of Quilter Cheviot’s Dubai office, and Shard Capital’s Bacon disagree on whether there has been a shift.
But one thing they both highlighted is the greater focus on and awareness of cost and value.
Leale said: “Part of the reason for this is that there has been changes in regulation which require more transparency when it comes to fees, which is certainly a good thing.
“Another aspect of this is that information is much more readily available in this digital age. This means that advisers and DFMs are having more conversations about fees and what value they are bringing the client over the long term. The best advisers and DFMs are good at articulating exactly the value they can bring the client and subsequently demonstrate it.
“International clients by their very nature often have complex financial needs. Ultimately, as a DFM, we also need to be able to provide a bespoke service that makes a client feel looked after in a way that another solution simply can’t.”
Bacon added: “Client demands of DMFs are unchanged. They want to see value for money and for a DFM to achieve the best investment returns they can, given the level of risk.
“Adviser demands have continued to change, and that trend has accelerated over the last two years. They want to see a low-cost solution and operational efficiency. Discretionary fund management in the advisory space has transitioned from a premium bespoke investment service reserved for high value clients to an outsourced generic investment solution that advisers can readily access.
“However, it’s worth remembering that thankfully, not all DFMs are the same and the traditional approach is alive and kicking if you look hard enough.”
While the DFM sector is very much established in the UK, the same cannot be said for the international space, several players told IA.
But demand for DFM services internationally are on the up, with Brexit and the rise of investible wealth in the Middle East being two of the main drivers.
Maurice Keane, head of international business development at Tilney Smith & Williamson, said: “The biggest changes have undoubtedly been driven by Brexit.
“Over the last year, European advisers have sought to ensure they are working with EU Mifid-compliant DFMs. But conversations with advisers about the post-Brexit regulatory environment were taking place long before the UK’s departure from the EU, particularly after it became clear that there were going to be no guarantees around equivalence or passporting.
“Being able to offer a full proposition under an EU Mifid licence has meant we have been able to cater to advisers under the new regime.
“What is interesting now is that even non-EU advisers are looking for Mifid-compliant asset managers, largely because they don’t want to have to move DFM if their client relocates to the EU – something not uncommon with transient expats. Increasingly, we are speaking to US-based advisers seeking to service the growing number of US expats in Europe.”
Shard Capital’s Bacon added: “It is easy to forget how mature the financial services industry is in the UK and the accessibility and choice that is available to the end investor. We can observe the wealth being generated in emerging markets and the potential opportunities that arise; but there are often regulatory, language and cultural hurdles to overcome.
“I think the opportunities are far closer to home and the challenges somewhat less. Western Europe’s DFM marketplace is woefully out of step with the UK. Consumers have limited choice and products are distributed via their bank. It’s ripe for disruption, and accessible, independent discretionary management could change the landscape significantly in countries such as Germany, France, and Spain.”
Middle Eastern rise
Both Tilney Smith & Williamson’s Keane and Quilter Cheviot’s Leale highlighted how much demand for DFM offering is increasing in the Middle East.
Keane said: “Many international advisers want to use DFMs with the broadest range of services and licences. We regularly speak to intermediaries in the Middle East who have clients around the world. They are increasingly looking for DFMs able to cover multiple jurisdictions, particularly if they have a single investment process.
“That means they don’t need to explain to clients the differences between a DFM in one country versus another, making their central investment proposition easier to articulate. And if the DFM can also offer other services such as a tax and accountancy, it saves advisers from needing multiple relationships to accommodate their clients.”
Leale added: “There continues to be a big opportunity in the Middle East. For example, according to the Boston Consulting Group, in just the UAE there is expected to be a 4% compound annual growth rate in the nation’s individual financial wealth reaching $700bn (£516bn, €612bn) by 2025 – a $100bn increase from 2020.
“The same report estimates that about 70% of that is investable wealth. Furthermore, the UAE is looking to attract more wealthy expats to retire there with the introduction of the golden visa being a good example of this.
“This will mean that there are more people requiring long term planning and while we often think about the growth phase in a client’s financial life the decumulation phase is equally as important and DFMs and financial advisers have a very important role to play in this.”