Starting with RLAM, the appointment of Trevor Greetham as head of the firm’s new multi-asset unit is just the latest example of the asset management industry’s growing focus on multi-asset capabilities and the products that such capabilities can produce. It is a trend that has been growing for a few years, but one that was significantly accelerated by the pensions freedoms announced in last year’s budget.
While much has been written about the rise of multi-asset and the possible windfall the freedom to choose something other than an annuity will be for the funds industry, less has been written about what this rise in focus on multi-asset funds might mean for Discretionary Managed Portfolio Solutions. In particular, that the increasing prevalence and popularity of these products could lead to a decline in the need for DFM services.
The Retail Distribution Review has seen advisers increasingly outsource the investment part of the decision making process, but, at the same time, the Financial Conduct Authority has increased the burden of proof required by advisers that the choices they are making are the right ones for each client. This is where the research by CWC and The Lang Cat becomes interesting.
According to the report titled Never Mind the Quality, Feel the Width: “Getting to the total cost of investing was seen as significantly more straightforward for MMs than for DFMs. The lack of transparency around DFM pricing, as well as trust in what is disclosed, were major issues.”
The report added that, the research conducted confirmed what had been suspected so far, that advisers tend to outsource smaller clients to multi-manager propositions and larger clients to discretionary managers.
But, it added: “There is something of an exception, however, in multi-asset funds which are becoming more mainstream. As we saw, there is an increasing appetite for diversity within investments and these funds meet that need.
It pointed out that nearly half of those who recommend DFMs say it is quite hard or very hard to identify total costs.
Due dilligence headache
“There was a recurring theme in our interviews about DFMs and the research process – that investors perceive them as having some ‘prestige’ that they are willing to pay for.”
But, it said, “It is impossible for us to separate the cases where this was the actual perception of the client from those where it was the adviser’s perception (or interpretation) of how the client feels.”
“The sum total of these points is a due diligence headache. We conclude that at present, there is no way for an intermediary to achieve an effective whole of market, time-efficient, quantitative analysis on model portfolios.
“In aggregate, we can make no case on a pure cost basis for saying that one style of proposition is more suitable than any other… We found some slight variations in performance between the two groups – on average, over time, you’re slightly better
off with the average MM/MA fund in a rising market and slightly better off with the average DFM portfolio in a more challenging market, but beyond that it’s pretty hard to make a case for anything much.”
Anthony Villis, of First Wealth agrees with the reports findings, telling Portfolio Adviser: “DFMs have traditionally been used for outsourcing where an adviser feels they don’t have the skill set to build and run a sensible investment solution. However, with the growing popularity of multi asset funds, many of which are benchmarked and risk categorised, its easier for advisers to select appropriate funds for their clients.”
He added: “As a business we feel that clients are looking for wealth mangers who consider lifestyle financial planning, investment management and tax planning. The three are so closely linked. As our industry evolves, performing only one of these functions isn’t enough. If this is the case, advisers will increasingly look to build propositions which combine the three disciplines, to help attract and retain their clients. Under this model, the role of the DFM is reduced in the future.”
There will always be a place for DFMs, especially those that can truly demonstrate their ‘prestige’ rating, but as the competition grows fiercer and the clients demand more, it will become increasingly hard to rest on one’s laurels.
