Breaking barriers: debunking common myths about working with a DFM

Breaking barriers: debunking common myths about working with a DFM

Last week I turned away a proposal to add £40 million in client assets to our books, and I feel good about that because it means our process for handling due diligence requests is working.

The industry is moving away from ‘outsourcing’ to building deeper partnerships and we want to support advice firms in finding Discretionary Fund Managers (DFMs) that really fit with the way they want to do business and the proposition they want to deliver to their clients.

We won’t be a match for every advice firm. In this case even though it might have resulted in a good outcome for the clients, our model didn’t align with what the advice firm wanted.

It can be a challenge for advice firms to assess that deeper fit, so we asked independent research firm NextWealth to explore how advisers are evaluating existing and potential partners and what they really want from a DFM relationship. Advisers can follow the link to access our latest guide around working effectively with an investment partner.

We’ve found the “myth-busting” chapter of our guide to working with investment partners to be the section that has generated the most conversation. So, I think it’s worth addressing the top four misconceptions here.

The idea of giving up stewardship of a client’s financial plan and losing control of the client journey or relationship underpins several of the objections NextWealth uncovered.

A good DFM partner will manage assets to an adviser’s mandate and help advisers deliver on their client’s objectives. Some of the key benefits that firms are deriving from bringing in a DFM partner are the decoupling of their client relationship from investment management and the freeing up of time to spend on developing that relationship.

One adviser interviewed for the report expressed a concern that advisers would have to “bounce back to the DFM” in order to answer their clients’ queries.

In a good working relationship with a DFM, the adviser should get access to portfolio manager commentary to help keep both adviser and client informed on asset allocation and the reasons for any changes made.

One of the reasons that we’re seeing firms shrinking the number of DFM partners they work with, and deepening those relationships, is to streamline communication and processes. Firms that partner with a DFM also maintain control over the client relationship and the adviser remains the client’s point of contact.

Aside from keeping control of the investment ideology and client relationship, the second biggest concern is around the flexibility to meet clients’ preferences.

Advisers voiced concerns about DFMs only “paying lip service” to the idea of collaboration and that where the firm holds “strong views on geographical regions or asset class attractiveness”, they might feel railroaded into off-the-shelf solutions.

NextWealth forecast particularly strong growth in “tailored solutions” as advice firms look for options to tailor and bespoke their service for clients.

Tailoring addresses many of the barriers to working with an investment partner. Portfolios can be customised to a client segment where there is an ongoing charges figure (OCF) cap or a geographical constraint, or map to a particular risk profile.

Where clients want to retain a holding, tailored models can include components of an adviser’s existing models to avoid the need to sell-down all assets, thereby reducing capital gains tax (CGT) and controlling potentially unnecessary transaction fees as well as easing the transition process to a new partner.

We heard from advisers with strongly held beliefs about DFM costs and charges, including the level of charges and the application of VAT and our guide addresses some misconceptions about those.

We’re seeing Consumer Duty, combined with market conditions, shift a lot of embedded thinking about what’s best for clients. What was particularly interesting about the proposal I declined last week is that those assets are currently sitting in very low-cost index funds and that wouldn’t traditionally be a proposal that would come our way.

Markets have become considerably more complicated and we’re seeing volatility happening much quicker. In clients’ minds, that’s raising questions about wanting something a little more proactive, and for advisers working with a DFM is an opportunity to bring in a partner to share the risk.

One advice firm interviewed for our latest guide described Consumer Duty as giving them “the ability to justify one provider over another not solely based on cost … if it gives a better client experience and outcome”.

Guide to working effectively with investment partners

A final thought on choosing your DFM partner

At the end of the day, selecting a DFM is all about exploring the art of the possible. Something else the report drew out was the move away from box-ticking due diligence to detailed conversations and meetings with investment teams. Through a more nuanced research process, advisers can ask questions that aren’t as simple as “yes/no” and they can build a partnership with their chosen DFM(s) that is deeply aligned to the advice firm and its clients. And that is a solution that clients can’t readily access elsewhere, so it also serves to strengthen the bond between the firm and the client.