Every quarter I take time out to analyse all the searches which financial advisers have undertaken using the compare tool on the DISCUS website .

The tool enables financial advisers to firstly select a proposition from one of the four available from discretionary fund managers (DFM):

  1. Bespoke portfolios. Personalised and constructed to meet a client’s specific investment objectives.
  2. Managed portfolio (direct). A portfolio invested directly with the DFM, usually constructed of funds and aligned to a risk profile. Minimal if any investment flexibility available.
  3. Model portfolio (available on platforms). Models available on third party platforms and often aligned to risk profiling tools. Typically the adviser signs a contract with the DFM to access
  4. Funds. Unitised version of the DFM proposition packaged as a multi-asset fund

The adviser can then select up to five discretionary managers and up to 20 criteria from business information to the intricacies of the proposition, functionality, services and costs. The information is presented in an online report with downloadable pdf’s covering business information for the DFM and their investment philosophy and process.

The statistics in relation to the adviser searches always deliver an interesting insight into the criteria which financial advisers are using as a starting point to undertaking further detailed due diligence.

This quarter, I looked back over the last two years to see if there were any trends I could spot and considered whether there is anything we can learn. You might find the following five points of interest.

 

  1. Proposition – The proposition which is most frequently analysed on the tool is ‘model portfolios on platform’. Since we launched the Discus business in April 2016, the number of DFMs offering this solution has risen significantly. Some recent analysis of the key platforms demonstrated that some of these platforms now support up to 90 different DFM model portfolios solutions.

This gives financial advisers a key challenge as demonstrated by one of the most frequently searched criteria – Unique Selling Point.

 

  1. Unique selling point – has appeared in the Top 10 criteria every quarter over the last two years. With so many propositions available, it’s little wonder that financial advisers struggle to understand how they all differ and in fairness many DFMs equally find it a challenge to articulate their differences.

Perhaps it’s unfair to expect a DFM to have a single point of differentiation, as the overall package of features and benefits should be considered when selecting a proposition to meet the needs of a client segment or individual client.

 

  1. DFM charge – It probably comes as no surprise that DFM charge has appeared in the Top 10 criteria every quarter. Given the increased focus on transparency of charges within the industry driven predominantly by legislation such as MiFID II, it’s interesting that we haven’t seen a reduction in DFM charges. The average charge for managing model portfolios on platforms hovers around 0.35% plus VAT, with the charge for bespoke portfolios up to double.

Charges are being squeezed across the value chain often with the focus often on the platform charge so we will keep a close watch on whether the cost for managing investments will start to reduce.

 

  1. Management style – is the only other criteria which has appeared every quarter over the last two years, so advisers are looking at whether the portfolios are actively managed or whether passive investments are used. In the last two years we have seen the rise of what we would define as hybrid models, e.g. those which are actively managed and the portfolios comprise of passive instruments. Cornelian asset managers for example, launched their Risk Managed Passive range in November 2016 and we would expect more propositions like this to come to market.

 

  1. Alignment to risk tools – has appeared as a search criteria in every quarter bar one over the last two years, where advisers can identify which tools the portfolios can be mapped against. Interestingly, the regulator has picked up on this challenge having indicated in the recent platform market review that the labelling of models can be misleading. The report found that the information platforms provide about similarly labelled model portfolios makes comparison difficult. The models can expose investors to very different underlying assets and volatility in returns. When ensuring that an investment portfolio is suitable for their client, it’s extremely important therefore for an adviser to understand how this is mapped against their risk assessment process and also the way in which capacity for loss is measured.

 

Lastly I’d like to highlight two criteria which have crept into the Top 10 in the last quarter:

% business from Financial Advisers

Many discretionary managers traditionally worked directly with private clients and have recently seen the growth in the use of DFM solutions by advisers as an opportunity to expand distribution. Perhaps advisers who are using this criteria as a benchmark want to understand how well the DFM understands their requirements and have reassurance about the level of experience the DFM has of working with different client types. This is particularly important for model portfolios on platform where the client is usually the adviser.

 

Range of propositions

Having undertaken a number of due diligence projects over the years, I have observed the increasing demand for DFMs to offer a full range of solutions. The recent focus on the new PROD regulations   has probably increased this demand.

 

If an adviser buys into the investment philosophy, style, research and processes used by a discretionary manager in addition to other features such as service, then it’s logical that they might want to offer the DFM proposition to their range of client segments in different packaged solutions.

 

You can access the Compare tool here – and as ever we would love to hear your feedback!