I am a major fan of the Nucleus annual census.

    It could be argued that because the respondents are all Nucleus users, it is not representative of the wider advice profession. But as the report itself demonstrates, many of them use other platforms - up to six according to the research. I therefore believe the Nucleus community is a good proxy for the adviser market and that the census is a useful barometer of advisers' thoughts, concerns and views.

    As a professional engaged in the discretionary fund management (DFM) market, I continue to observe growth in the use of DFM models on platforms. With this in mind, I reviewed the census with a keen eye for any observations about the DFM market and investment propositions in general. Here are my five key learns from reading the report.

    1) In house model portfolios continue to gather the largest proportion of client investments

    Some 45 per cent of all users with in-house model portfolios will allocate over 80 per cent of client monies into this solution. This is an increase from 34 per cent in 2017.

    I’m constantly surprised at the number of advisers continuing to build their own model portfolios, particularly if operating them on an advisory basis. This means client consent is required for every change to the portfolio. If consent isn’t received from everyone then some clients are moved to an updated version and others left behind.

    Prior to platform technology being available, most advisers relied on spreadsheets, a calculator and fund switching functionality to try and manage client portfolios and keep them in line. The introduction of model portfolio functionality over 10 years ago significantly reduced the time required to carry out this task.

    However a major downside is that over time the requirement for client confirmation can lead to a significant number of portfolios being maintained. The process of waiting on client confirmation and then updating portfolios on an individual basis is still hugely inefficient.

    As a result, there have been continual rumblings over the last few years that advisers were increasingly applying for discretionary permissions which would address this. Yet the next key takeaway suggests that all is not what it seems…

    2) The interest in gaining discretionary permissions appears to be waning

    In 2016, one in five respondents planned to hold discretionary permissions and this has now dropped to one in 10. The number already holding permissions has remained constant at 8 per cent.

    So the reality doesn’t appear to be reflecting the ‘rumblings’. I have worked with a number of advisers who have started the process of applying for permissions. They have discovered that the challenge is not just gaining the permissions but also the investment committee, governance and oversight processes required when managing models. So is the use of outsourced DFM propositions on the increase?

    3) Around 35 per cent of advisers said they would increase their usage of DFMs

    In addition to this figure, 10 per cent of respondents said they would begin to use DFMs. So perhaps the future remains promising for DFMs?

    It's worth considering here the responses to questions about the FCA’s asset management market study, which showed Nucleus users expect to see better transparency of charges along with lower charges and more effective price competition. This, combined with MiFID II requirements for investment managers, sees three-quarters of users expecting asset management charges to decrease with 30 per cent expecting that to be a significant decrease. 

    This could be an interesting challenge for DFMs who are often branded as ‘expensive’. Will there also be an expectation that their own management charges are reduced? Will it lead to fewer actively managed portfolios or more propositions where there is an active overlay but using underlying passive investments? 

    While on the subject of charges, what about those of advisers themselves?

    4) In the past year, most firms have made no changes to their initial and ongoing charges

    I recall debating ongoing adviser charges with Nucleus chief customer officer Barry Neilson following the publication of last year’s census. At the time, the data indicated that ongoing adviser charges were reducing. We were unsure as to whether this reduction for the first time was a blip or the start of a pattern.  

    This year 21 per cent of advisers have increased their ongoing charge and only 4 per cent lowered this.  However if we look at this in the context of the actual charge, this has moved from 0.83 per cent in 2015 to 0.815 per cent in 2016, and now sits at 0.798 per cent. The direction has therefore continued to be downwards which potentially indicates that a trend is emerging. This is supported by conversations I am having with advisers who are telling me they are feeling the pressure on fees.

    5) 30 per cent of users don’t use cashflow modelling tools or use an in house solution

    This was a surprise for me. I constantly read articles in the press from financial planners espousing the need for cashflow tools. Since the introduction of pension freedoms and the move of many clients into drawdown arrangements, advisers should be looking at the transition into retirement and modelling this to ensure the client has enough to cover their anticipated retirement income. I would therefore have expected this number to be lower given the quality of the Nucleus adviser community.

    However, the number had actually fallen to 30 per cent from about 35 per cent last year so this is definitely moving in the right direction.

    There has been some recent debate on selection and due diligence for cashflow modelling tools. Former FCA technical specialist Rory Percival commented that perhaps firms require a simple tool but also a more complex one where additional features are available, for example, helping advisers understand the impact of the depletion of cash assets from different sources and the impact that has on the overall portfolio. It’s also important to understand the assumptions being made by the tool when calculating any income projections.

    Overall, the census continues to prove that life in the financial planning world is continually changing. Beyond the observations I've outlined, there are also interesting insights into other topics such as business growth and efficiency, use of platforms, business structures, regulation and exit strategies. 

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