A Rathbones report highlighting adviser satisfaction with DFM investment performance and improvements in risk/return profiling has been met with scepticism by a number of individuals in the advice industry.
The investment manager examined adopters versus non-adopters in its latest installment of its report series examining adviser use of DFMs.
According to Rathbones, 72% of adopting advisers confirmed an uplift in portfolio performance, while 66% cited improvements in their clients’ risk/return profile.
For advisers that shunned DFMs, 76% said it was due to costs and justifying fees.
The third chapter of turned its attention to how the use of DFM ‘adopters’ and ‘non-adopters’ has differed over time.
The most common single concern for advisers not using a DFM, cited by 76% of nonadopters, was cost and justifying fees. NextWealth data also revealed that cost was one of the main barriers cited by advisers for not using DFMs.
Different risk, same results
Informed Choice chartered financial planner Martin Bamford, who doesn’t use a DFM, says the additional cost “never seems justified” in return for the value added.
“Portfolios on offer are usually a handful of blue-chip stocks, collectives to gain international equity exposure, and then some government bonds. When we compare their past performance against that achieved by our in-house model portfolios, they are often taking greater risks to deliver similar results over the long-term.”
Darren Cooke, chartered financial planner at Red Circle Financial Planning, uses a DFM for just one client.
“In this case, the client had used DFMs prior to coming to me, the investments were a mess, there were capital gains tax (CGT) issues that had been badly managed and some of the fund / investments held could not be transferred to a platform for me to manage,” Cooke says. “We transferred to another DFM to manage these holdings and the CGT issues.”
Performance has been similar to the client’s other investments not held with the DFM, he adds. “Essentially, they have managed to cover their own fees but add no additional value.”
A DFM will suit no more than 5-10% of most adviser clients and most would be better served using “vanilla fund options” outside a DFM, he says.
Multi asset funds prefered
DFMs were also perceived as too expensive in NextWealth research, based on a survey of 267 financial advisers. This was particularly so for price sensitive investors in decumulation.
Instead, one quarter of advisers expected to increase use of multi-manager or multi-asset funds and 23% expected to increase use of equity release/lifetime mortgages, the report said.
Cooke says: “There are many multi-asset funds available on the market now that will produce better returns, risk managed and cheaper but frankly it isn’t difficult to model your own portfolios using tracker funds at a fraction of the cost of a DFM.”
Helpful for managing complex pots
Phillip Instone, financial planning director at PGI Financial, uses DFMs for 10% (£3m) of his total assets under management (c.£32m). Brewin Dolphin, Quilter and Parmenion as his preferred DFMs, which he selected based on market research, reputation, functionality, expertise and price.
“Certainly, using DFMs means I can manage a number of complex pots myself,” Instone says. “For example, I’ve got a client who has got just under £2m under management, but he’s got a pension pot, an Isa pot, a collective and so on.
“A DFM enables me to give the Isa collective pot to one DFM and then the pension pot to another DFM and I remain as a control over them which means I can coordinate the operations rather than be bogged down in the day to day running of the solutions.”
DFMs grapple with cost
Advisers are “passing the buck” on managing clients investments to the DFM, according to Cooke. “The adviser doesn’t pay for that the client does and I’d take a fair guess that in most cases the advisers do not subsequently reduce the clients ongoing advice fee because the adviser is in effect doing less work.”
Nextwealth managing director Heather Hopkins says DFMs are doing a lot to try to bring down costs, including using their bargaining might on fund managers.
Hopkins says: “Brewin Dolphin’s move to use segregated mandates is one prime example. Others are pushing harder for access to preferential share classes or increasing allocation to passive products.”
Advisers often complain to her that trying to figure out what a client will actually pay for a DFM model portfolio on platform is “devilishly difficult” and reviewing performance net of fees is equally hard.
“DFMs need to do more to make fees – not just their service fee – but the overall cost to the client much clearer.” Brewins and Evidence Based Investing are particularly good on fees and transparency, she reckons.
Bamford says he does not see anything “inherently wrong” with introducing an additional layer of charges as long as clients understand what they’re paying.
