The rapid rise of investment outsourcing in the past 10 to 15 years shows no signs of slowing down as advisory business models continue to evolve in the wake of market volatility and the ever-changing regulatory process. Industry estimates put the number of advisers using Discretionary Fund Managers (DFMs) at around 40-45% and many expect this number to reach 60-70% in the next few years. In 2014, Skandia estimated £52bn was held in outsourced portfolio management services, a number it expected to rise to £141bn by the end of 2016.
This trajectory is reasonable considering advisers are now under more pressure than ever and their time is precious. The brave new world following the implementation of the Retail Distribution Review has forced them to increase transparency as they seek to put client service at the centre of their business model. This has come at a cost, both in terms of time and money. As a result, many advisers no longer consider investment selection to be their strength.
Outsourcing investment decisions to a third-party began moving into mainstream over 10 years ago as the impact of a prolonged bear market, split-cap crisis and the technology bubble showed many advisers investment selection was not the simple task many thought it was. Most importantly for UK advisers, the demise of with-profits products led to a search for similar one-stop-shop solutions. Skipping ahead a decade; the global financial crisis coupled with the implementation of regulatory change through the RDR heavily bolsters the case for outsourcing.
This is further supported by the CoreData Adviser Fees and Business Models report 2015, which shows advisers only spend 15% of their time managing existing client investments. More importantly, only 11% of advisers view managing existing client investments as their most important task.
With the dust barely settled on the RDR, the continued clamour for outsourced investment offerings a now has a poster child in the shape of MiFiD II as advisers are set to see further costs and regulatory processes thrust upon them. Increased transaction reporting, investment research rules and disclosure of best execution are expected to generate both one-off and ongoing costs which are unlikely to be passed on to clients.
The advantages are obvious. Advisers no longer have the time to trawl through thousands of funds to find the right investment for their clients. This time restriction has also led to the rise of risk-rated and risk-targeted funds, which are now prominent offerings of the majority of asset managers in the UK.
The number of DFMs has also grown in the past few years as has the range of services they offer – from bespoke offerings to a managed portfolio service and even unitised discretionary management.
DFMs are now firmly at the epicentre of fund selection. As they are key gatekeepers of the funds industry, it is essential for asset managers to understand how they operate and what makes them choose or eliminate a manager from their selection process.
Despite this, there remains a lack of trust, confidence and education among many advisers when it comes to DFMs. This is a barrier which, if overcome, could make the opportunity even larger for this part of the market.
Among advisers, numerous myths still surround the DFM market. These include fears they will steal the end client; lack of confidence they can justify their fee if they are outsourcing to wealth managers; the additional cost of using a DFM service; the level of assets clients need to access the service; and lastly a fear that once advisers place their assets with a DFM it is impossible to transfer them out again.
Should DFMs demystify these preconceived notions, they are bound to see their assets grow even further. Add to the pot the uncertainties Brexit provides for many advisers who are still making their own fund selection choices and the upside continues to increase.
This report will outline core DFM considerations such as investment philosophy and their proposition as a business. It will also analyse tools and metrics DFMs use to identify strategy are highlighted and current asset allocation splits and attitudes towards different asset classes.
In addition to understanding manager selection, the report also looks at how DFMs like to interact with asset managers and how they would like to receive information. The aim is to give asset managers a better understanding of how to approach these asset influencers.
CoreData Research conducted interviews with 92 Discretionary Fund Managers across the UK to map business practices across their industry.
Specifically, the study looks across five key strands of this market segment. These are the manager selection process; how they decide the appropriate mandate for their business; their relationships with asset managers; general business models and their outlook and investment position for the future.
Data was gathered over an eight-week period between July and August 2016 over the phone and our online research portal. All interviewees were asked the same questions; respondents only answered those relevant to their business.
The aim of the report is to gather insight into how this growing market of asset influencers is behaving and evolving to better understand how to interact with them.