SEI Investment Management Unit head of investment solutions Andrea Hohlachoff looks at advisers' increasing use of discretionary fund managers and asks what are clients really getting or their money?
Consensus trades often inspire unease. So what should we make of recent research, published by Investec Wealth & Investment, that found 47% of advisers currently use discretionary fund managers (DFMs) and an additional 10% are planning to do so?
That the majority of advisers will soon be outsourcing some or all of their investment processes to DFMs should not, on the face of it, cause concern.
After all, many of the larger DFMs employ experienced, talented investment professionals able to leverage the dedicated resources and research infrastructure most advisers lack. But is there a question mark over what investors receive in reality from DFMs' portfolio services? Or to put it another way: when is bespoke really bespoke?
Does bespoke always means bespoke?
Now that many platforms have built the functionally to manage model portfolios on their systems, more and more investors are getting access to DFMs through this channel rather than having a direct relationship with the DFM. Nothing wrong with that, of course: model portfolios are, essentially, multi-asset funds like many others in the UK retail market.
But that is where the lines begin to blur. If a fund is generic - if it is in no way tailored to an individual's specific requirements, which is the case with most model portfolios - then it is manifestly not bespoke. But do investors fully grasp that reality?
The difference between a bespoke portfolio service and an off-the-shelf equivalent might, to a reasonably experienced investor, be crystal clear. But is it unreasonable to imagine that some investors will assume they are getting a more tailored solution than they actually are?
Regulatory issues notwithstanding, I suspect some would argue this is ultimately a problem of little consequence. If the performance delivered by a DFM is likely to be better than an adviser could generate, then is a minor misperception all that troubling? But here's the issue. DFMs are expensive.
According to research by Defaqto, service fees for Managed Portfolios services range from 0.30% to 1.25% for accounts over £500,000. These fees are, of course, on top of both adviser and fund manager charges.
High charges are not necessarily a concern per se: if you are a high net worth investor enjoying a truly bespoke service, with strong performance, those high charges might be justifiable.
But model portfolio charges still remain in many cases significantly higher than equivalent off-the-shelf solutions offered by mainstream retail fund managers. Bear in mind that VAT is applicable on DFM services and they become even costlier relative to other untailored options, which often deliver superior risk-adjusted performance. So what do investors think they are paying for?
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