Platforum: Does outsourcing to DFMs risk losing clients?

Many financial advisers avoid using DFMs because they are worried that they will lose some of their best clients to these outsourced investment experts. 

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The latest move by bankers Cater Allen to start marketing directly to IFAs’ clients, after years of these advisers using Cater as outsourced cash managers for clients, will add fuel to this particular fire.   

Most DFMs go to great lengths to reassure advisers that they would never poach clients. But worried IFAs point out that Cater Allen did just this for many years and now look what has happened. 

What’s more there are persistent rumours in the market that certain leading DFMs are none too worried if advisers’ clients give their IFAs the heave-ho and go straight to the DFMs and their own financial planning advisers. 

Even the most sincerely pro-IFA DFMs would be hard put to stop a client sacking their IFA and coming direct to the DFM if they saw that the IFA was adding little to no value and they could save a non-trivial level of annual fees as a result. 

Some DFMs are just that – they don’t have planning arms of their own, so their protests of innocence in this regard sound more sincere. 

IFAs are split. Some regard themselves as investment specialists and will not outsource to DFMs. Whether their self-belief is justified only they and their clients can really tell. 

Meanwhile, other IFAs regard themselves as people who can choose good investment managers and are therefore reasonably comfortable with outsourcing. “If I select the investments myself who can I fire when performance is poor,” an IFA recently told me.

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IFAs need to be able to convince clients that they can carry out appropriate due diligence to appoint the right DFM and then assess them on an ongoing basis to make sure they stay on track. It is a credible sounding narrative, although the reality may sometimes not quite live up to the proposition. 

How do IFAs select DFMs? A round of golf, a dinner a few times a year – these are some of the ways that the old school DFMs describe their meetings with the financial advisers they work with. This may seem like an era long left behind but in fact, among those managing money for the 1 per cent – or even perhaps the 3 per cent – these very civilised business practices still exist. 

Financial advisers operating at the top end of the market have long-standing relationships with discretionary managers. The decision to work with a firm or individual is not taken lightly. This is a relationship-based choice, and it is often a relationship that lasts a career. 

For those working with very desirable clients but ones who don’t need a security detail when in public, the criteria are a bit different. Charges top the list in recent Platforum research, selected by 87 per cent of advisers, and investment performance comes second, selected by 81 per cent. 

This scrutiny helps but is not enough to justify one’s place in the value chain. 

Financial planning is a separate science from running money and advisers who are to survive a world of greater transparency about costs and investment growth to cover everyone’s fees will have to earn their clients’ loyalty. 

Financial planning using such techniques as long-term cashflow planning and needs analysis is one powerful approach that clients will appreciate. Another is tax planning. The major changes to the taxation of savings and dividends as well as IHT have handed advisers some powerful weapons. There’s a lot of alpha to be derived from tax planning, and it is pretty much risk free. 

But the natural suspicion that many advisers feel about some DFMs will only grow with the actions of outsourcers such as Cater Allen. Trust is a fragile thing.  

Chances are that advisers who use DFMs will increasingly want them to stay away from direct contact with clients and operate solely through centralised investment propositions. They will want these to be on platforms to further distance the DFMs from the clients and to facilitate switching to other managers if the need arises – whatever that need might be. 

Heather Hopkins is research director at Platforum.