Comparing DFMs: a tough nut to crack
The implementation of RDR and increased regulatory burden on advisers has led to a sharp rise in the number of firms considering outsourcing to DFMs. Nucleus, for example, conducted some research with around 200 of its users earlier in the year and found that almost half (47%) were looking to increase their use of DFMs in the next 12 months.
However, concerns have been raised that some of the data provided by DFMs is difficult for advisers to compare and assess. So, what steps can the industry take to make it easier for advisers to evaluate DFM solutions in a meaningful way? This was one of the key talking points at a discussion organised by MRM, featuring a number of industry experts, including Sesame Bankhall Group, Thesis Asset Management, Nucleus, DISCUS and Silverback Consultancy.
There is a belief among many in the industry that there currently isn’t enough transparency, particularly where costs are concerned. This is a view held by Gillian Hepburn of DISCUS, one of the panellists, who feels that standardisation would help to an extent. “Disclosing costs within funds, including managers’ fees and other operational costs as well as dealing costs would simplify the due diligence process for advisers when looking at DFMs”, she says. Lawrence Cook of Thesis Asset Management agrees that simple measures could be taken to make this data robust and available. “Each DFM could be made to publish transaction costs from the past 12 months, for instance”, he suggests.
Cook also points out that some standardisation already exists within the industry. “Advisers currently have access to a range of third party providers, such as ARC and FE Analytics, which allow them to compare DFMs on a like for like basis, when considering certain aspects of risk management and performance”. Most – but by no means all – DFMs subscribe to these services, so there is awareness within the industry that more could be done to support advisers in picking the most appropriate solution.
Could the FCA play more of a role in helping advisers choose the most suitable DFM? Since all DFM firms are registered and work closely with, the regulator, in theory, it should not be too difficult for it to compile a rank and file list of DFMs, beginning with the most competitive in terms of costs, while red-flagging others for lack of transparency.
However, there are limitations to all these approaches, as Hepburn acknowledges. While fund costs are an important area of consideration for advisers, they are usually not the only factors when it comes to identifying the most suitable proposition for a client. Other issues, such as the manager in question and whether the adviser feels they can work productively with them, the reputation of the DFM firm, whether they look after similar adviser clients, and even the geographical location can all come into play. “In these instances, advisers are likely to be focused on qualitative rather than quantitative data”, says Stephen Gazard, of Sesame Bankhall Group. Trust, instinct and chemistry will play a crucial role in these decisions: after all, there is little room for analytics when you simply don’t get on with the manager.
Equally, Barry Neilson of Nucleus reminds us that there is no getting away from the fact that no two clients are quite alike and this is especially true where bespoke models are concerned. “In these instances, an adviser is seeking a solution tailored to fit a particular client’s needs. Hence, there is no simple, one size fits all answer.” Again, this makes the process of finding a DFM more subjective than those calling for greater standardisation across the industry might want to admit.
So the issue is complicated. While there are quick and easy solutions to the problem of making quantitative data produced by DFMs easier to untangle, qualitative considerations don’t respond as well to the tick-box and spreadsheet strategy. Cultural fit is a much tougher nut to crack.