Just how transparent will DFMs get

The news yesterday that Financial Express has launched a service allowing financial advisers to compare DFM model portfolios is another welcome move in the quest for greater transparency across the sector.

Just how transparent will DFMs get


But, it does come with a few questions. Prime among them is what sort of take up there is likely to be?

There is no doubt that there is a growing demand for transparency within the DFM space as more IFAs outsource their investment process and the FCA demands ever clearer due diligence processes explaining exactly why a specific investment solution was selected. And, it is clear that the current situation doesn’t lend itself to clear and easy comparison.

Indeed, in a recent study conducted by CWC Research and The Lang Cat, into the growing trend toward outsourcing, the two firms found that “the industry is being stifled by a lack of available, consistent, comparable data. This is causing detriment to investors, advisers and providers alike and needs urgent attention.”

Anthony Villis, partner at First Wealth believes that while advisers are required to have detailed due diligence as to why they have chosen one DFM over another, “much due diligence has focussed on the qualitative side of the offering, and quantitative data has been more difficult to assess. More tools to help with a broader assessment are therefore valuable.”

He adds: “More transparency on performance and portfolio characteristics should help allocate capital better and improve competition on charges. Both good outcomes.”

For Clive Waller, founder of CWC Research as another step in the right direction.

“Where we are hoping this will lead is to a situation where DFMs will realize the need to provide clients with their data. Ultimately, you want to get to a situation whereby you can compare model portfolios in the same way as you do funds.”

For those firms present at launch that realisation seems to have happened, as, Rowan Dartington Signature MD, Guy Stephens, pointed out: “All practitioners in the industry are increasingly having to demonstrate adequate due diligence and relying solely on data provided by the DFMs is open to question and manipulation.’’

Simon James, a partner at Gore Browne Investment Management, however, is a little more cautious saying that, while he completely understands why IFAs would want the due diligence process to be made easier, in order for the comparison to be effective, the models need to be playing in the same space.

Gore Browne does not produce model portfolios and so would be unlikely to use the tool as it stands. And, as James says, it is more and more difficult to compare solutions the more bespoke they become.

He adds: “If there is too much homogenisation, it can take choice away from the client. Our concern is that by commoditising the client, you may not be treating him fairly,” he said, adding, “it might tick the regulatory boxes but it might not tick the client boxes.”

DFM’s have, historically, been reluctant to provide detailed information of their investment process, understandably viewing such things as the intellectual property on which their businesses are built. But, especially in the model portfolio space, the tide is clearly shifting against such views.

Whether or not such disclosure eventually flows over into the bespoke end of the spectrum is a more difficult question to answer, but the move by FE and other recent developments such as the STEP Whitelist are all steps in the direction of transparency.

The real challenge is now is going to be figuring out the best way to provide such data so that it is useful for both advisers and DFMs.