Since the introduction of RDR the financial adviser community has steadily been increasing their reliance on DFMs to run their clients portfolio. The 2017 Nucleus census, which surveyed 200 financial advisers, found that 44% of respondents will begin to use or increase their use of DFMs over the next year.

    What is well known is there are two ways advisers are choosing to go. The first way remains the traditional adviser approach, a centralised advisory portfolio proposition. Combining the use of a stochastic modelling tool or asset allocation tool with fund research or pre-built advisory portfolios, enabling the adviser to remain as both the trusted adviser and the investment consultant.

    There are challenges to this first way. As a result of the introduction of the new definition of independence that came in with RDR, additional research has been required by IFAs to ensure the wider range of investments are included for consideration for their clients. This has put a strain on resources often resulting in advisers having to employ an investment analyst/research team or has reduced their ability to focus on business development and finding new clients.

    IFAs who have found a way to deal with the additional research requirements through ‘buying in’ pre-packaged advisory portfolio solutions have not been able to manage away the risk entirely. For example, rebalancing creates stress in trying to get all advisory clients to take up the fund change recommendations. This can result in clients having different portfolios at the same risk level, while the suitability responsibility remains with the adviser.

    The second way IFAs have chosen is to establish a DFM panel. Outsourcing the investment management to DFM model portfolios, while retaining the suitability responsibility. Remaining as the trusted adviser but losing the position of the investment consultant. Depending on the IFA business’ client segmentation, and client needs, they may introduce an investment director from a DFM to clients requiring a more bespoke portfolio.

    The main reason IFA firms tell me why they have stopped providing their clients with advisory portfolios, and instead introduced DFM panels, was to reduce risk. Although many of them have found some clients have started to question the ongoing adviser fees with the investment management clearly provided by a third party.

    I understand why IFA firms with large numbers of advisers and clients immediately start with a panel of four to five DFMs, or more. They generally have the resources to conduct research on often as many 15-20 DFMs to produce a short list. Requesting due diligence information and conducting interviews with the short listed DFMs to establish the panel. Repeating the due diligence process at least once a year, but in some cases as often as quarterly.

    The third way

    If you are a small firm I believe there is a third way for you. Find one discretionary management firm who is prepared to go through the process of developing your investment proposition with you and helping you make the transition away from advisory portfolios. Working with an investment partner who understands IFAs, and the DFM ‘whole of market’, will enable small firms to make right decisions for their IFA business and their clients. They are a number of key decisions, such as…

    • Should you insource your new discretionary portfolios, white labelled in the name of your IFA firm to avoid losing your position as the client’s investment consultant and challenges to your adviser fees?
    • If you do, are you going to want your new discretionary portfolios tailored to incorporate your requirements or be model portfolios determined by the DFM?
    • If not insourced then what type of DFM is most suitable for you outsourced investment proposition?
    • How are you going to transition from an advisory to a discretionary investment proposition without effecting your existing client relationships?
    • What are the key added value areas that the right DFM can provide you that will enable you to optimise your new investment proposition?
    • Are you comfortable that you have conducted adequate due diligence to ensure the discretionary investment management proposal you put to your clients is suitable; or do you risk 'shoehorning' them into unsuitable investment models?

    In the next article we will look at these key decisions. If you would like to discuss these with me please call me on 07557 341005 or email me on

    If you do not know me, then you should know that I am G60, AFPC and PCIAM qualified and a Chartered Wealth Manager. I have provided investment advice to private clients for sixteen years, eight and IFA and eight while at UBS advising clients of IFAs.  I have spent the last eight years helping IFAs develop their investment propositions and grow their businesses.

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