The debate rages on as to whether financial advisers should look after their clients’ investments and manage portfolios in-house or outsource them to a DFM.
Following the RDR there was an uptick in advisers going down the outsourced route but in recent years we have seen this trend reach a plateau. Our conversations with advisers present a clear divide in opinion.
The ‘outsourcers’
A lasting argument of why advisers may outsource to a DFM is to allow greater focus on financial planning and leave investment management decisions to the ‘experts’. Another reason cited is that running models on an advisory basis can be quite onerous, especially when rebalancing and switching. Running advisory models can create a wide variety of portfolios with an unintended range of outcomes for clients. Platforms have helped advisers by facilitating bulk rebalancing of portfolios.
The ‘insourcers’
On the other side of the fence sit the ‘insourcers’ – mostly advisers running in-house advisory models. One driver for running this approach is the cost of outsourcing. A typical DFM fee for running model portfolios will cost between 0.30% and 0.40%. Many advisers feel that they can create their own risk-targeted models at a lower all-in fee which can deliver comparable returns to their clients.
MiFID II has thrown a spanner in the works for both advisers and DFMs, however. Those running advisory models now face the additional challenge of presenting all clients with costs and charges disclosure for switches and rebalances. In contrast DFMs will be doing all the heavy lifting where they run the portfolios. Of course, those who run portfolios on a discretionary basis face the task of notifying the client within 24 hours following a 10% drop in the portfolio value – something which may well come to fruition in 2018 in an environment of increased market volatility.
We think that the majority of SME advisers have broadly settled on their desired levels of outsourcing. Perhaps the biggest moves will come from larger firms looking to bring investment management in-house to take advantage of an extra link in the value chain.
Our next report in the UK Fund Distribution series – Model Portfolios on Platform – will be published next month. In the meantime, if you’re an adviser or DFM, do get in touch to talk about where your firm stands in the outsourcing debate – we’re always open to your views.