Advisers who do not use discretionary fund managers (DFMs) typically shy away because they fear it will become difficult to justify their advice fee once a third-party is added to the equation.

Close to 55% of a sample of advisers cited this as a major barrier to working with a DFM, according to a report produced by CoreData, in partnership with Rathbones. This was second only to costs.

This dilemma is clearly very real for many advisers out there. One intermediary who was interviewed for the report explained that they had reduced their ongoing advice fee after appointing a DFM – in recognition of the fact that they no longer managed client money.

“We take the long-term view that it frees us up to concentrate on other areas. Other firms may find that a difficult pill to swallow,” the adviser explained.

This highlights one of the biggest challenges associated with appointing a DFM – the potential for fee reductions or for fee pressure to arise. Any adviser who is considering whether to work with an investment manager is likely to give this topic a lot of thought – and rightfully so. Nobody likes the idea of having to drop their fees.

 

A new service proposition

At DISCUS, we don’t believe that advisers who work with DFMs need to justify their fees – and certainly shouldn’t feel pressure to lower them. Appointing a third-party comes with a host of new responsibilities. These should be recognised and should not detract from your service offering. Working with a DFM creates the opportunity to offer a new service: one that relates to the integration of your services with those of the DFM.

Some of the tasks include:

» Assessing the client situation and lifetime goals
» Ongoing suitability of discretionary proposition
» Regular reviews of client requirements and circumstances
» Regular discussions with the DFM about client portfolios to ensure alignment with client objectives and attitude to risk
» Analysis of portfolio performance and comparison with benchmarks
» Face-to-face meetings with the DFM manager
» Regular audit of DFM investment reports
» Ongoing due diligence of the DFM chosen

There is a lot of value in this new service offering, especially when you package it in a way that reinforces your skill-set as an adviser, delivering long-term benefits of financial planning.

 

Don’t overlook the positives

Fees represent just one element of a much bigger equation – and Rathbones’ report on the value of discretionary fund management sheds light on this. Far from proving detrimental, the report found that advice firms benefited from using a DFM in a variety of ways – with improvements recorded in client relationships, investment performance and even profitability.

For example, 72% of advisers reported better investment performance since appointing a DFM, while 66% said the risk-return profile of their clients had improved. Drilling down on the sample of DFM users (of which there were 67), Rathbones and CoreData found that 80% of advisers who used an investment manager for six years plus reported an improvement in performance. This compares to 65% amongst those who had worked with a DFM for one to five years.

The report also found that advisers who work with DFMs spend 2.5 hours extra on average per week with fee-paying clients. This helps to explain why 58% of DFM users surveyed were able to generate more paid time from existing clients: annual revenues from this sub-group totalled £220,716 last year, some 18% higher than £186,606 by non-DFM users (totalling 33).

 


Figure 1. Greater satisfaction and results among users and third-parties

 

Meanwhile, Rathbones and CoreData found that advisers who work with DFMs typically earnt £15,000 more per year in comparison to non-DFM users. This may have something to do with the finding that DFM users charged a higher average hourly fee of £206 compared to £196, working with 19 more clients on average. Advisers who work with DFMs had an average of 172 clients versus 151 for non-DFM users.

This extra time spent with clients may go some way towards explaining why close to two thirds of DFM users felt the relationship with the client had strengthened since a third-party had been appointed, while 55% felt client trust had improved.

These findings underscore the numerous positives associated with working with a DFM – and we believe that these far outweigh any concerns an adviser may have about justifying their fees. It’s important to take a step back and look at the bigger picture.

Click here to read the full report.


This post was created for the DISCUS website for Rathbones to coincide with their latest report The value of discretionary fund management. You can find out more about the Rathbones discretionary investment services here ›