AKG launched its DFM financial strength ratings and reports in July 2016.
We can see from the assessment process during this time and from our ongoing monitoring of wider developments that competition for intermediary business in the DFM sector is seriously heating up, and with MPS propositions right at the heart of this battle, writes Matt Ward, communications director at analytics firm AKG.
Advisers, paraplanners and others in roles within intermediary firms who are responsible for DFM research and due diligence exercises would therefore be well-served to ensure that they have adopted robust and repeatable selection/retention processes, and furthermore, that they keep their finger on the pulse in terms of staying abreast of ongoing developments.
There are some high-level reasons as to why it is important to continue to reflect on partner choices made and to monitor ongoing activity in the DFM space.
Dramatic backdrop – economic/societal landscape
It goes without saying that covid has had a big impact on our working and personal lives since March 2020, and financial services companies have been challenged in unforeseen and multiple ways.
From a DFM perspective, advisers and paraplanners will have no doubt already gained a sense of how things have played out with their investment partners in terms of the DFM’s ability to showcase operational adaptability, resilience and strength during this period.
The service delivery standards experienced by advisers and their clients, especially digital capability, will also have been under the spotlight and inevitably there will have been a close eye kept on investment performance.
The wherewithal to be able to continue to invest in the business should be considered as some DFMs may have had to put the brakes on this where their capital reserves and/or their access to ongoing investment support have perhaps been challenged.
Corporate level activity
As you might expect in a highly competitive marketplace corporate level activity has been busy in recent times and there have been examples of DFM M&A, private equity investment in DFMs, as well as continued market entrances and a few exits.
All of these corporate developments will have some relevance to advisers and paraplanners as they consider their ongoing, as well as any new, DFM relationships.
Particularly given that such working partnerships are generally intended to be long term.
Sheer breadth of market competitors
Whilst there might have been a traditional picture of DFM market players in the past, the breadth of company types now competing for outsourced investment business from intermediary firms has widened considerably in recent years.
Beyond the incumbents, who prior to targeting intermediary business had typically come from private client backgrounds, we are now seeing outsourced investment propositions marketed by an extremely wide range of companies, including for example: platforms, asset managers, intermediary firms, fund/fund manager research houses and actuarial firms.
Mission creep from other sectors is at play here but the heavy focus for many of these competitors has been in the delivery of managed/model portfolio services propositions.
MPS battleground
As already alluded to the key current battleground at a DFM proposition level revolves around MPS. Ultimately these are easier to develop and bring to market than bespoke portfolio services and crucially they are competing for client portfolios in the mainstream market, say £25,000 to £200,000 ($275,853, €235,051).
A few sub-plots of intrigue and focus within this MPS battleground include the following:
- Pricing – Driven by this competition for intermediary business and because of wider cost pressures across the value chain MPS pricing appears to be in an elevator heading to the basement. It really does seem to be a question for market incumbents of how low can you (sensibly) go? And what, if any, might the trade-offs be? DFMs will therefore need to ensure that they at least remain competitive on pricing and hope that advisers and clients feel a sense of value from the service experienced. From an operational and process perspective DFMs can ill afford clunky systems and/or any requirement for manual intervention when seeking to deliver MPS and keep pricing so low.
- ESG rush – There has been a plethora of ESG-themed MPS proposition variants launched in recent times and DFMs are keen to discuss their investment approach, beliefs and processes in this area. There is a danger that advisers will become overwhelmed here and DFMs will need to try to cut through the noise when it comes to ESG as well as avoiding any ‘greenwashing’ accusations. DFMs will also need to ensure that at a corporate level they are seen to be walking the walk from an ESG perspective rather than just showcasing things at an investment proposition level. As with so much, a focus on what matters to clients and the dialogue with them on the component parts of ESG, quite possibly different for different clients, is a guiding principle here.
Platform distribution
Whilst some MPS propositions are available direct, the holy grail from a distribution perspective has been for DFMs to develop third party platform distribution relationships.
The first challenge has been to establish such links, but the subsequent and ongoing challenge has been to achieve consistent business flows via the platforms.
Being ‘heard’ when a platform might offer access to 20-30 DFM links for its users can be difficult and so DFMs need to continue to cultivate these working and operational relationships with platforms to ensure that they bear fruit.
Drawdown
Many MPS propositions were originally developed for those clients saving and consolidating funds but there is now also a focus on delivering compelling propositions which can drive income drawdown investment strategies.
Understanding client requirements in retirement, properly considering attitude to risk and capacity for loss at this life stage and then helping to protect funds and deliver requisite income streams will be a clear differentiator for DFMs and advisers.
Bringing context into due diligence
Taking into account all of these factors, and others not covered here, it will be fascinating to see who the likely winners and losers will be in this space during the next few years.
Clearly the requirement for intermediary firms to undertake comprehensive and robust research and due diligence exercises when considering DFM relationships is brought home here and furthermore that this should include an understanding of market context.
This article was written for International Adviser by Matt Ward, communications director at analytics firm AKG.
