Uniquely in the UK, advisers control around 80% of retail fund distribution. The competition to attract advised assets has been increasing in intensity since the removal of any commission bias following the RDR. And in recent years, discretionary fund managers have re-doubled their assaults by launching model portfolio services through adviser platforms. In fact a new cadre of DFMs only offering model portfolios MPS on-platform has emerged. DFM model portfolios now compete with in-house model portfolios and arguably multi-asset funds.
If we look behind the numbers, we can see from Platforum data that the highest proportion of assets – 35% – sits in model portfolios run by advice firms in-house. The percentage of advisers who outsource model portfolios to third parties is similar to those who run in-house models, but the aggregate value of assets in third party models only accounts for 19% of total assets.
There are a couple of obvious explanations for this. DFM MPS is a much newer investment solution: advisers have been running in-house model portfolios for years. But we also hear that advisers increasingly use DFM model portfolio services for a range of clients including those with lower levels of investable assets. It could also be evidence that smaller firms are more likely to outsource and large firms with their own DFM solutions, who have more assets, keep assets in-house.
Our next report UK Fund Distribution: Model portfolios on platform will give more detail on the profile of firms outsourcing model portfolios.
Why do advisers outsource?
At our recent event, Platforum’s Investment Strategy Forum, we asked advisers and DFMs why we have been experiencing a wave of outsourcing and whether we might see greater numbers of advisers taking on discretionary permissions themselves? Advisers’ criteria for using third party bespoke DFM are reasonably clear cut. Advice firms tend to use bespoke discretionary fund management for wealthy clients (but not always): “We would use a bespoke DFM for wealthier clients.” Or they will use bespoke for clients with specific needs: “For clients with oddball needs we will use individual bespoke DFMs.”
But the drivers for outsourcing to third party model portfolios are less clearly defined: ‘There is no obvious pattern as to where IFAs use models or insourced solutions.’ But in our conversations with advisers and discretionary fund managers one rationale came up time and again: de-risking.
A number of advisory firms that we speak to see financial and tax planning as their core focus. There is little appetite among these firms to take on asset allocation or responsibility for investment management.
The appetite to manage investment risk can be affected by the cycle of the market. Some DFMs have suggested to us that in a bull market advisers may be more optimistic that they can manage the investment risk effectively.
But not all advisers believe it is quite that simple. Advisers are still on the hook for their choice of outsourcing partner. DFMs tell us that it is often difficult to make it clear to advisers that they must take responsibility for suitability, whilst the DFM is responsible for the mandate.
Managing investment risk is often a driver for investment outsourcing, but our conversations make it clear that by outsourcing advisers do not absolve themselves from responsibility to the client.
At the Investment Strategy Forum, the managing director of a DFM asked the crucial question of one adviser who does not currently outsource model portfolios: ‘What would cause you to start outsourcing?’
When it comes to the crunch, it seems that risk management is the only real consideration: “Advisers are scared by risk… the risk of clients not getting the outcomes we have said they will get. We need to be able to demonstrate [that we can achieve these outcomes] to clients and we need to be able to deliver… this will push outsourcing forward.”
We are currently speaking to advisers about their views on investment outsourcing and how they are using third party model portfolios. As always we would be really interested to hear from you – so please do send in your views and comments.
We are also speaking to advisers from across the country about the business of being advisers. The aim is to understand the challenges that advisers face but also to hear about the positive developments and innovation taking place in advice firms across the UK. If you would like to speak to us please email me at miranda.seath@platforum.co.uk or call me on (020)7943-8049.