Greater DFM scrutiny needed – Nucleus

Scrutiny by financial advisers of outsourced discretionary funds managers needs to improve, according to UK-based wrap platform provider Nucleus.

Greater DFM scrutiny needed - Nucleus

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According to the platform’s latest census of users, the use of discretionary fund managers is set to increase.

The firm said over 47% of users said they will begin or increase using DFMs, 14% said they planned to decrease use and 39% say they do not use DFMs, down from 44% last year. No-one responded that they will stop using DFMs, the firm said.

But, it added, while usage of such propositions in rising, the type of due diligence being undertaken is not yet sufficient.

Risk assessment 

Barry Neilson, business development director at Nucleus said: “To date, due diligence has focused more on other parts of the value chain, such as platforms. The FCA is taking a growing interest in this area, not least through the guidance it issued recently on suitability in the form of TR16/1. Firms need to look beyond DFM performance and consider investment companies’ wider infrastructure and, more to the point, each DFM’s ability to address risks which could emerge in future.’

He added that the increasing transparency around fees post-RDR means that many advisory firms will need to widen their client propositions, or risk coming under price pressure. But, this will likely result in an increase in the fragility of the relationship the adviser has with the client from a remuneration point of view.

“It is therefore essential that firms ensure they don’t have weaknesses in any major elements of their propositions, so we would encourage advisers to carefully consider the risks attached to all significant forms of outsourcing,” Neilson argued.

DFM usage to grow

However, it added, More users are considering holding discretionary permissions in the future (22%) compared to last year (16%) which would bring the total of adviser firms with discretionary permissions up to 30% overall. 87% of users employ a centralised investment process (CIP) for clients, which is down on last year (96%), Nucleus said.

From an investment standpoint, Nuclues said the biggest change to investment approach is a slight but noticeable switch towards passive management up from 22% to 28%.

“This no doubt reflects the on-going market uncertainty and stock market volatility. That said, active management remains the most common approach (37%), but this has dropped significantly and isn’t hugely ahead of those using passive or a mixture of both (c.30%).”

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