An annual study by the financial information business gave insights from 289 financial advisers outsourcing their investment management to third parties, while offering comparative insights with the previous year.
The study looks at 14 criteria and assesses the advisers’ satisfaction levels and concludes that, while overall satisfaction levels are higher, there is still work to be done.
It covers areas such as quality of staff across different functions, service levels, ease of doing business, access and quality of information, methods of remuneration and investment flexibility.
Advisers become more demanding
Pan Andreas, head of insight & consulting (funds and DFM) at Defaqto, says: “Advisers are getting more demanding in their service expectations and while discretionary firms are certainly improving, there’s still work to be done.
“Four out of the top five categories in terms of importance still fail to meet adviser satisfaction expectations. These results should serve as a warning that firms should be mindful of adviser requirements and not become complacent.”
Advisers put the most weight on the quality of staff in the investment team, which mirrored the 2017 study (when range of investment assets available was joint most-important), while the 2018 survey showed service as second, closely followed by the range of investment options.
The survey says: “Top of the adviser importance league is ‘quality of staff – investment’. This was one of our biggest concerns last year, suffering a big fall in satisfaction.”
While still falling short of expectations, the category has seen one the most significant improvements, which Defaqto says will be encouraging for advisers.
“Service however is still falling short. This indicates that there are still areas that advisers feel could still be improved upon.”
Remuneration, referring to method rather than cost, was the least important factor in both 2017 and 2018.
Defaqto defined it as “Adviser charging facilities are compatible with preferred method of fee remuneration.”
Compliance drives shift in adviser focus
Interestingly, remuneration levels were absent from the report, which Tilney head of business development Craig Wright says is usually among the top factors when completing a DFM questionnaire.
He is witnessing a shift in advisers’ focus towards compliance-related areas.
“We are getting a lot more questions on X-rays on portfolios, X-rays on asset allocation, how fees are charged in different environments; this has become the new normal, so we are on top of that.
“Obviously we can never promise returns, but especially when returns are so difficult to predict as have to focus even more on service.”
Wright says the breadth of service offering is growing, as is the role of ‘gatekeeper’ compliance firms.
Major DFM brands dominate
On average, advisers are using 2.7 discretionary firms, an increase from 2.5 last year, while Brooks Macdonald, Brewin Dolphin, Quilter Cheviot and Investec Wealth & Investment were the top-used DFM providers by advisers taking part in the survey. There were 27 DFMs named in total by respondents as being used in the last 12 months by at least 2% of respondents, demonstrating a long ‘tail’. Another 40 firms were selected five or fewer times, so were not counted in the rankings.
The dominance of the bigger names, such as those aforementioned, may be a result of strong branding, according to Graham Bentley, managing director of investment marketing adviser gbi2, the only criterium which dipped in satisfaction levels versus the previous year, down by 1 percentage point, to 70%.
He says most advisers outsourcing their investment management may be granted a shortlist but says he “can’t see them getting a parade of DFMs coming before them” from which they then choose.
“I suspect that is not the case, so they are more likely to know roughly who will be good at providing that service. If they were buying funds, they would look at performance but unless they subscribe to ARC – and even that is error-laden – I’d argue they most likely can’t tell the difference between Brewin, Brooks or anyone really, so it is most likely based on name.”
He suggests brand also feeds through to culture and ethos, and understanding your target market.
“I imagine it is similar to the way people choose a platform; they will arrive at a shortlist of names, then probably go and see their contact locally but I suspect most will not go through a formal RFP process and then a number of presentations and discussions after that.”
DFM and adviser relationships
Wellian Investment Solutions chief investment officer Richard Philbin believes it’s about both sides working together so the DFM can fully understand the adviser’s requirements.
“Both sides have to justify their fees: the DFM to the adviser, the adviser to the client and both sides to the regulator.”
He recognises creating ‘added value’ in a service environment is difficult, especially as compliance demands increase and the world is moving from a quantitative easing to a quantitative tightening monetary environment.
“We cannot guarantee returns, we are all under pressure for fees, but we also want to be able to deliver upon requirements. Performance is obviously is a key measure, but access to the DFM is important, the relationship and ad hoc requests.”
Accessibility, alongside quality of literature, enjoyed the biggest jumps upwards, with a 7% improvement in adviser satisfaction.
Bentley explains: “I interpret accessibility as whether you deal with a product director, or you actually get to speak to the person running the money.”