As the battle to win retail investments heats up, financial advisers start to baulk at multi-managers’ high fees
DFMs and multi-managers have been vying over each other’s turf for some time. Traditionally, DFMs targeted high-net-worth clients with substantial assets to invest, while multi-managers have catered towards retail investors with significantly smaller pots of investments.
As DFMs broaden their propositions to reach a wider investor base, predominantly by managing model portfolios on platforms, the line separating them is increasingly blurred, but who will ultimately win the battle over retail assets?
The charts below tell the story from the financial advisers’ perspective. According to our latest surveys, the share of assets held in multi-manager funds seems to have plateaued and may have started to decline.
Having been nearer 20 per cent of advisers’ assets under advice in July, this proportion declined to 15 per cent last October. A closer look behind these figures reveals more than half of advisers (57 per cent) report using MMs, but these funds account for only 15 per cent of assets under advice. Meanwhile, more than two-thirds of advisers (71 per cent) report using DFMs’ model portfolios and these account for just over half of advisers’ assets under advice (51 per cent).
Conversations with financial advisers and multi-managers confirm this trend. High fees are to blame, as the RDR has heightened advisers’ price awareness. The outlook seems brighter for multi-managers, however, in the less mature D2C platforms segment, as DIY investors are generally less price-sensitive. For example, 10 per cent of Hargreaves Lansdown funds under management sit in multi-manager funds.
On the DFM front, there is a trend among financial advisers to choose model portfolios on platforms, as this makes it easier to change DFMs should they underperform; it also mitigates the risk of losing the client relationship. DFMs have thus had to cope with platform limitations that can range from having a narrow choice of investment vehicles to select from, to operational issues such as it being impossible to execute a simultaneous buy and sell trade.
Despite having the same strategic and tactical asset allocations, the on and off-platform model portfolios of the same DFM’s proposition can at times be significantly different. Interviews with DFMs would inevitably say the differences are small, but on close scrutiny, the cumulative effects of the deviations over time can be a hindrance to asset-gathering in the long term.
Many platforms are now focusing on developing their capabilities to meet the needs of DFMs, particularly the fund supermarkets. Until they come up to speed, however, DFMs need to establish an on-platform track record and find ways to overcome platform operational challenges. One DFM that offers its proposition only on platform has done just that. By incorporating an overlay fund within its model portfolios, Tatton Investment Management has ingeniously found a solution to overcome platforms’ limitations.
The battle to win retail investments is fierce. We see the greatest opportunities for the multi managers as being in the D2C space and with DIY investors; while the greatest opportunities for the adviser market is the on-platform model DFMs. The key to success for both camps lies in innovation. A long-established track record is only the prerequisite to long-term success.