This week, five of the largest DFM firms – Brewin Dolphin, Brooks Macdonald, Investec Wealth & Investment, Quilter Cheviot and Rathbones – got together and launched an ‘alliance’ to sell financial advisers the benefits of outsourcing their investment function to specialists. The DFMs are cooperating in their marketing to advisers and more firms are expected to be joining the alliance in due course.
The move is necessary. It looks as if advisers’ enthusiasm for outsourcing their investing to DFMs has gone off the boil. At Platforum we spotted the plateauing a year ago and announced it to a mildly sceptical reception. The evidence for the new trend is clear.
DFMs were sweeping all before them in the adviser sector during the run-up to the RDR and then in the following couple of years. The proportion of clients’ investment assets managed by DFMs leapt up by a third between 2013 and 2015 – from 18 percent in 2013 to 24 percent in 2015. Extrapolating that rate of growth, one might have expected the proportion of adviser assets under the care of DFMs to reach well over 30 percent by mid 2017.
In fact, DFM market penetration by assets under advice was just 26 percent in November 2016 and it might reach 27 percent in the middle of this year, assuming the current trend continues.
DFMs are already feeling competitive pressures and their fees are on a generally downward trend. Of course, DFM fees are just one link in the value or cost chain, which with provider, platform, DFM and adviser charges can easily exceed 200 bps.
So why is the growth of the DFM market seemingly running out of steam? Here are some of the possible reasons:
- Larger firms are buying up smaller advisers and bringing their clients onboard into their in-house, vertically integrated, managed investment solutions. On average, about a quarter of those clients will have been in DFM managed portfolios.
- Advisers are increasingly aware of the need to keep a cap on overall costs, because of long term impact on investment performance and also growing client perceptions of the importance of keeping costs down.
- Some medium-sized adviser firms have seen how certain large adviser businesses seem to be making big profits from their vertically-integrated structures and have decided to bring back their investment in house.
- There are many different provider-led solutions and they too have their attractions for advisers compared with DFMs’ offerings. In some cases, it is the cheapness and efficiency of the service – for example, offering Vanguard. In other instances, the provider has a compelling story – for example Dimensional.
- But many advisers still think they are reasonably competent at running money themselves – whether or not they are justified in such a belief.
The new DFM alliance clearly has its work cut out.
We will be discussing these and other issues at Platforum’s Investment Strategy Forum, co-hosted by Fidelity at 25 Cannon Street on the 30th March 2017. It is an invitation-only event held under the Chatham House Rule aiming to promote industry discussion and debate around topical issues including:
- Do uncertain times mean unpredictable markets? The outlook for asset allocation
- Will more advisers take on discretionary permissions?
- How DFMs and platforms can work more effectively together
- What do advisers outsourcing investment selection look for from DFMs?
- Who will win the battle for asset allocation?
We will also share Platforum data on the investment strategies that advisers are using, outlining trends since the RDR. We will offer a view on whether investment outsourcing will continue to plateau or gather pace given market conditions and regulatory headwinds.
Spaces are limited and we will need to maintain a balance of key people from DFMs, advisers and distributors. If you would like to attend, please email Miranda.Seath@Platforum.co.uk