Some feel they are well – or even better – qualified to offer investment advice than a DFM. Others are vehemently anti-active management and even though DFMs could construct passive arrangements, the figures show that it is something of a sideshow for them. Then there are those who have used DFMs in the past and had bad experiences. Valid reasons all.
But the reason there seems to be such a strength of feeling is because the decision, although based on business need, is a somewhat emotional one. And if you have had a bad experience of one DFM, it will be very hard for an adviser to outsource their investment even if it seemed to be the best thing to do.
One investment adviser told HNW: “I’ve found that there are some excellent DFMs and some who add very little value, so it’s difficult to generalise.”
He feels that for large Sipp (self-invested personal pension) portfolios, a DFM can often work well, because by buying equities direct, the cost of running the portfolio can be reduced significantly, from a total expense ratio (TER) on managed funds of 1.5% or more to 0.8%, which is a huge saving on large Sipp. In addition, with a Sipp, there are no CGT issues to worry about, so there are opportunities for what he calls “real management”.
That said, he agrees that advisers are often their own worse enemies when they “take trail commission without really delivering an ongoing service to the clients, which is a wasted opportunity, because who else is going to make sure that performance is monitored and tax planning issues are addressed?”
Williams de Broe’s Mark Stevens says the ongoing move towards individuals taking greater responsibility for own investments is driving on the demand for DFM services (see CHART 10). Whereas 10 or 15 years ago, people didn’t even consider pensions arrangements, they have now started to assert active control, over them.
“There are fewer in final salary schemes and the norm will be to put a certain percentage away at an early age. There will also be a move towards a more formalised relationship with IFA groups assisted by open architecture, with two or three DFMs on a panel,” asserts Stevens, as the development of technology that will assist that move.
The desire to have access to investments in an open architecture is part of the drive behind the adoption of platforms among advisory firms. Firms like his, says Stevens, can offer a whole range of services and products. It focuses on investment, the back office is outsourced and it has links with most providers. So clients and their advisers can access ISAs, trusts, charities, emerging market portfolios, most Sipps, SSASs (small self-administered schemes) and QROPs (qualifying recognised overseas pensions) or offshore bonds through its platform.
“We can effectively offer advisers a wrap, all managed by the same individual and with online access,” Stevens says.
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“The benefit of professional management with a wrap just happened to be wrapped up with a DFM, not an insurer.”
That point will not be lost on many advisers who have rejected the offers of provider-led wrap platforms.
Ultimately, as with any other professional relationship, there must be rules of engagement. One investment professional told HNW: “One sets boundaries. Step outside and the DFM is liable. Those boundaries should be summarised in no more than 10 lines. Then everyone understands.”
He advises the following as a basis for a service level agreement: commission cannot exceed x% of account value a year; turnover cannot exceed x%; single stock concentration cannot exceed for instance 5%; sector concentration of no more than 20%; and have a single position stop loss. If this agreement is deviated from, the DFM would be liable.
Andrew Neligan of Informed Choice, a chartered financial planner and winner of best newcomer in the New Breed Adviser Awards 2009, says that if a DFM can truly offer a bespoke, added value service to a client then they may offer the answer to an adviser’s – or perhaps more commonly, a financial planner’s – prayers. But only as long as it consists of a portfolio that is tailored to the client’s goals and their attitude to investment risk.
“Discretionary fund management needs to be more than a model portfolio, be it cautious, balanced or aggressive in its style, as a core in which every client is invested,” says Neligan, “with a weighting in additional investment – hedge funds, commodities or absolute return for example – as satellite holdings.
“Added value is positive returns in all markets and not only losing 15-20% when the market has lost 30%.”
