Are advisers overcomplicating investment management?
By Ben Peele - April 28, 2020
Money Marketing’s latest annual DFM Satisfaction Survey makes for interesting reading and throws up some points that I think are worth commenting on.
One finding that struck me was that 20% of advisers surveyed used five or more DFMs, with the commentary suggesting that this could ‘be reflective of the FCA’s product governance requirements, and advisers taking greater care with their approach to segmentation’.
In our view, running a large number of DFM relationships as a strategy to satisfy FCA requirements for segmentation is an over-complicated route (the time required to manage these relationships must be significant) and is outdated.
You could compare it to before we had music streaming, when people bought albums because they liked one or two of the songs. Today streaming services enable you to pull all your favourite songs together to make your optimal playlist. This approach already exists in the investment world: it’s called ‘mass customisation’ and it’s the way forward in terms of business efficiencies for advisers and better outcomes for clients.
The survey also highlights that, ‘in a commission free world, advisers have much less interest in fund picking and manager selection’. This is because the majority of advisers now regard themselves as financial planners, with a far more holistic approach to managing clients’ financial aspirations and needs.
Of course, advisers are always on the hook for investment performance, whether they do it in-house or outsource to DFMs. Their clients trust them to choose the right investment solution to give them the best chance of meeting their financial goals.
The survey also highlights that expectations among advisers for DFMs are high: they are expected to outperform the markets during the good times and cushion the falls during times of crisis. What isn’t covered by the survey is how risk fits into all this.
Creating and maintaining portfolios that align to clients’ risk appetites is essential, both in terms of maintaining trust between the adviser and their client and also in terms of the adviser staying compliant.
The danger is that chasing “outperformance” can result in higher risks being taken than perhaps fits with clients’ risk profiles. These risks are easy to overlook when markets are surging upwards but can leave advisers exposed when they are selling off.
So, while the survey definitely presents an interesting snapshot of adviser views on DFMs, it also highlights that there is plenty of work still to do in terms of meeting regulatory requirements without putting undue strain on adviser businesses. We firmly believe we can be part of that solution.