DFMs and the transparency challenge

Discretionary fund managers (DFMs) need to considerably up their game on transparency if they are to meet the ongoing trend for advisers to outsource investment decisions and the regulatory demand from Mifid II, research has found.


According to an independent study by consultancy the Lang Cat, many DFMs are opaque when it comes to portfolio construction and investment performance. This comes as a Schroders’ survey found an increasing number of advisers are looking to outsource the investment process.

The Schroders Adviser Survey 2017, published this week, quizzed 250 UK advisers and found a decline in the percentage of those not looking to outsource portfolio management, from 48% in 2016 to 42% this year. In other words, more advisers are looking to outsource their investments.

And when it comes to outsourcing to a DFM in particular, it found 21.49% expect to pass over the bulk of their assets (51-100%) to a third-party during the next year.

Schroders co-head of UK intermediary, James Rainbow, says: “Clearly there is a regulatory need for advisers to have a centralised investment proposition (CIP) in their businesses and have a consistency of implementation across their clients. That is relatively hard to achieve if you are doing it in-house as it requires resource.

“Advisers are taking one of two options: increasing size and skill of in-house teams or outsourcing to someone else.”

The Lang Cat’s survey, commissioned by Tatton Investment Management, analysed three methods of CIP: establishing an in-house CIP; using a multi-asset/multi-manager fund; and outsourcing to a DFM’s managed portfolio service (MPS).

It agreed with the Schroders survey that the introduction of Mifid II in January will make life difficult for advisers running models without discretionary powers. This, it says, will lead an increasing number to use a multi-manager/multi-asset fund or outsource the process to a DFM’s MPS.

Lack of transparency

The Lang Cat believes that while the outsourced DFM model can offer a way to shed the burden of making investment decisions, “far too many have a long way to go on transparency”.

The study said: “We have no problem finding out what’s going on in multi-asset funds, but successive studies into this market [DFMs’ MPS] have led to considerable frustration.

“So one thing our research says is: if you can’t find out freely what a DFM is up to in its MPS, then steer well clear.”

‘Secret sauce’

Mike Barratt, consulting director at the Lang Cat, says he finds it hard to understand how an adviser can make a personal recommendation on an MPS if they cannot work out what it is, how much it costs and what is going on under the bonnet.

He says: “I am not sure there is anything deliberate in terms of hiding anything nasty, but it seems to be for a number of DFMs there is a feeling their ‘secret sauce’, their intellectual property, is exactly what their portfolios are made up of and exactly how they have been performing – and they don’t want to share that with the market.

“I don’t think that is good enough these days. The level of transparency that is mandated through Mifid and what advisers expect requires DFMs to do a lot more.”

On and off-platform

Part of the problem, as Lothar Menthel, chief investment officer at Tatton Investment Management, sees it, stems from differentiating between on- and off-platform DFM services.

He believes being on-platform is more transparent because from a fee perspective an adviser can get an OCF quote on any portfolio that is on there, whereas that service is hard to ascertain off platform.

Further to Barratt’s “secret sauce” point, Menthel says when it comes to investment performance, many off-platform DFM services pride themselves on being bespoke to client requirements (the secret sauce) and say because of this, it is not possible to show representative performance.

“You can overcome that by offering only MPS-based discretionary services. We make decisions for the client and implement them in the portfolio,” says Methel. “That means one person’s active balanced portfolio is precisely the same as someone else with the same portfolio profile.

“It is not bespoke, but that leads to more consistent investment outcomes for the end client. That relaxes the adviser because they don’t have to explain why two clients with the same risk profile have a different return to each other.”

Methods of comparing DFMs do exist, for example Financial Express’s Transmission or through Asset Risk Consultants. Barratt says this is starting to make it easier to compare one model versus another. However, each DFM has to subscribe to the service and some simply choose not to.

Brewin Dolphin says it is committed to transparency and within its MPS, it  has always detailed the exact make-up of the model portfolios and places this information on factsheets which are updated monthly.

A spokesperson for the firm says: “In addition, we produce platform specific factsheets covering all 11 platforms, the performance of each platform, and the model composition of each platform, and these are also available on a monthly basis.

“We feel this transparency is key and it is important that advisers can make informed decisions about our solutions.”