Advisers shun DFMs to avoid awkward fee chats with clients

Nearly a fifth of advisers say they would never consider outsourcing

How the shift to ongoing commission impacts investment advice

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Some advisers are avoiding outsourcing their investment management duties to specialists because they fear they will be forced to lower their own fees or that it would give them the awkward task of explaining a “double layer of charges” to their clients.

After higher costs, having to lower fees was the second biggest concern cited by non-DFM users, a report commissioned by Rathbones found.

Thirty-five percent of advisers said they would struggle to justify their own advice fees to clients if they outsourced their investment management piece to DFMs.

Uncomfortable conversation

“Advisers place a strong weight on the argument that investment management is included in their ongoing fees, so a move to the DFM model removes this and hence it is harder to justify fees,” one unnamed respondent said.

More advisers have been turning to DFMs to manage client investments on their behalf to cope with “seismic regulatory events” like RDR and Mifid II, which have burdened them with additional reporting and compliance duties, Rathbones said.

The report noted an estimated 40% to 50% of IFAs have passed on the investment activities to a third-party DFM and many expect this figure to jump to 60 to 70% in the next few years.

Research is a full-time job

Ben Yearsley, director of Shore Financial Planning, says the reality is that very few IFAs have the time to research funds, which he says is a full-time job on its own, or have the luxury of hiring an in-house specialist.

“If you’re an IFA with £100m under management you can afford to divert some of that toward investment research if you want to. But if you’re a £30m ($39m, €34m) IFA firm it’s a lot harder.”

Yearsley admits his firm is in an “unusual position”. It has four advisers whose sole job is to look after the clients, while he single-handedly takes care of fund selection and research. He says he meets with roughly 15 to 20 managers a month.

Not all discretionary solutions are expensive

Gillian Hepburn, director of discretionary partnerships at Discus, says there is “still a myth that all discretionary solutions are expensive”.

She says the rise of model portfolios and unitised multi-asset funds have both broadened access to DFM expertise and solutions in a way that is “cost competitive”.

“If you’re buying a discretionary solution in a more packaged format in a fund or a model portfolio on a platform, there are some good solutions out there,” she says.

The vast majority of non-DFM users surveyed by Rathbones (70%) said lower costs might persuade them to outsource and assuage some of their reservations about performance and justifying their fees.

However 18% said there was nothing that would sway their current position.

Higher hourly fees

By outsourcing the investment piece advisers have more time for financial planning and areas where they can deliver value for their clients like pensions freedoms, Hepburn adds. And they have a DFM on-hand who can assist with more bespoke client demands like special portfolio inclusions or exclusions or income requirements.

The Rathbones study revealed that advisers who use DFMs had higher hourly fees on average than those who did not.

Advisers who had adopted the outsourced model made an average of £206.40 per hour compared with non-DFM users who made £196.40. They were also generally double the size of non-DFM users with 20% more clients per adviser.

Firms were also able to boost revenues by monetising client time more effectively.

Source: CoreData Research for Rathbones

While meeting with existing clients was the biggest revenue generator for both DFM and non-DFM users, the former was able to squeeze more money from managing existing clients while devoting more time to other areas of the business, such as training and regulation.

Rathbones said the findings contradict a picture often portrayed by the media that advisers are getting a bum deal and demonstrate “the facts, realities and successes of long-term DFM usage”.

Old fashioned fears

Hepburn says fears that DFMs will poach clients from out underneath advisers as soon as they enter the picture are “old fashioned”.

Although this was lower down the list of concerns for advisers in the Rathbones study, 5% cited this as a reason for shunning DFMs.

She adds that there is no incentive for DFMs to engage in behaviour that would be damaging to their brand.

The future she thinks is about having advisers as client gatekeepers who are able to bring in a range of experts – investment managers, accountants and lawyers – depending on the client’s needs. But she stresses “the adviser should always remain in the centre of it all”.

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