In the post-RDR world, the volume of options available to advisers looking to outsource their investment management has expanded rapidly.
While off-the-shelf managed portfolio and risk-targeted solutions have increased in popularity, bespoke discretionary management for high-net-worth clients has also been viewed as a possible option for advisers looking to concentrate more of their activities on financial life planning.
A Money Marketing research project has shed light on how discretionary fund managers, which also offer advice services, manage the interaction between the two and attempt to mitigate potential conflicts of interest.
Respondents have provided evidence of outperformance and cost management, while also noting that housing DFM and advice services within the same group can indeed have a number of benefits.
Experts have also spoken out against concerns that in-house DFMs could be set up to poach external planners’ clients.
On 3 December, Money Marketing approached 16 DFMs which also had a related advice business to request information on how the two are linked, giving them until 19 December – two and a half weeks – to respond.
The DFMs, which represented firms of varying sizes and regional footprints, were asked the following questions:
- What is the value of discretionary-managed assets at your firm?
- What proportion of all assets under management are in discretionary-managed portfolios?
- For each of the past three years, please provide the proportion of flows into discretionary portfolios from advisers within the group compared with external advisers.
- Please provide the proportion of total assets under management advised on by advisers within the group compared with external advisers.
- Are your in-house advisers restricted (if so, please describe the restriction) or independent?
- Please provide details of the charges for each available set of model portfolios for advisers within the group and external advisers respectively.
- Please provide typical charges on bespoke discretionary portfolios for advisers within the group and external advisers respectively.
- For each of the past three years, please detail the performance after charges of each available set of discretionary model portfolios.
- For each of the past three years, please detail the performance after charges of any model portfolios run on an advised (i.e. non-discretionary) basis by advisers within the group and external advisers respectively.
At the time of writing in early January, four firms (Quilter, Brewin Dolphin, Brooks Macdonald and Whitechurch), had provided responses to at least part of the questionnaire. Four declined to comment. The remainder – eight firms - did not respond.
A Mercer spokeswoman says that the firm declined to participate because it does not “as a matter of course, provide this sort of granular, commercially sensitive data/information”.
The others that declined to comment did not specify a reason for doing so.
Fighting for flows
The responses reveal a range of figures for how many assets are coming into DFMs from their in-house advisers or related advice businesses.
For example, around a fifth of assets at Quilter Cheviot – the DFM owned by the financial services group formerly known as Old Mutual – comes from advisers at Quilter’s advice businesses Intrinsic and Quilter Private Client Advisers.
Flows from internal advisers have doubled from two years ago and are now running at around £200m a quarter.
Whitechurch – which manages 100 per cent of its assets on a discretionary basis - has seen similar growth in flows from internal advisers. Flows from internal advisers were 29 per cent in 2016/17, rising to 42 per cent in 2017/18. Discretionary assets directly with the firm stand at £376m, compared with £14.6m spread across platforms.
Conversely, Brewin Dolphin has seen the proportion of discretionary funds advised on by in-house planners drop from 73 per cent to 67 per cent between 2016 and 2018. In-house advisers accounted for 33 per cent of flows in 2018, down from 42 per cent in 2016.
Of Brewin’s total £40bn in funds, £3.6bn is non-advised and around £37bn is managed on a discretionary basis.
In financial results released in September, Brooks Macdonald noted that its in-house financial planning business had become a “major introducer” of funds into its investment solutions. While it declined to disclose exact numbers, in the Money Marketing survey, the firm said that the “vast majority” of flows into discretionary portfolios and assets under management still come from external advisers.
Brooks Macdonald has a similarly high proportion of overall funds in discretionary mandates at 97 per cent of its £13bn overall book, while Quilter Cheviot’s discretionary managed AUM stood at £21.3bn as at 30 September 2018, approximately 87 per cent of Quilter Cheviot’s total AUM.
While True Potential declined to comment on our survey, financial results published last year showed the firm had grown assets in its discretionary portfolios by £2.1bn in 2017. From a base of £700m in 2015, total in-house funds stood at £3.8bn in 2017, driven both by True Potential network advisers and through platform sales.
Striving for suitability
Other firms have been less clear about the extent of links between advisers that sit within their group and the assets they are bringing to the group’s discretionary solutions.
Money Marketing has seen a communication to members of the press regarding the launch of an investment management business by a financial services group that also has a financial advice business under its ownership.
The firm says that it was specifically looking to promote the investment business separately without mentioning the wider financial planning group links.
DFMs including True Potential and Quilter Cheviot also have an interest in platforms as part of their group structure. In its platform market study in July last year, the FCA found that in-house model portfolios investments on platforms have increased from £5bn in 2011 to £38bn in 2017, raising concerns over the extent of effective competition in the market.
Money Marketing has also seen marketing communications from AFH – which did not respond to our survey – regarding its decision to remove platform fees for clients who use AFH’s own platform service, AFH Direct.
Money Marketing understands the platform can only be accessed by an AFH adviser.
As part of the pitch to move to AFH Direct, AFH lists some of the benefits over a traditional platform service as “access to our delegated authority funds”.
The letter reads: “We want to do the best we can for you, without having hard-won investment returns eroded by unnecessary third-party costs.”
A number of advisers have told Money Marketing that the platform is one of a number of mechanisms AFH uses to encourage in-house advisers to recommend its discretionary services and own funds.
AFH has previously declined to comment on potential conflicts over in-house advice, DFM and fund services.
Responding to questions on the devolved authority funds it runs in-house asked by Money Marketing earlier this year, an AFH spokesman said: “AFH is proud of its independence and its long-standing determination to deliver the best outcomes for its clients, and our establishment of devolved authority funds and our removal of platform fees are fully consistent with both these values.”
However, other DFMs have mounted a staunch defence of the suitability of their propositions for both internal and external advisers in response to Money Marketing’s queries.
Whitechurch says that while its advisers are restricted, it will only use its own DFM where suitable and “will not use unregulated high-risk products”.
Brooks Macdonald notes that its in-house advice firm, Brooks Macdonald Financial Consulting, is a separately regulated firm of independent financial advisers, whose clients are separate to those of Brooks Macdonald Asset Management.
It adds that when it comes to charges the internal advice firm “is treated in exactly the same way as external advisers” for both Brooks’ managed portfolio service and bespoke discretionary portfolio creation.
Picking out performance
Performance credentials have also been put forward by the leading DFMs as a reason why in-house and external advisers alike are right to trust them with managing investment mandates on their behalf.
Charges for Quilter Cheviot’s model portfolio solutions – not including adviser charges, platform or wrapper fees from third parties - vary by strategy, from 1.21 for a growth MPS to around 0.5 for a balanced strategy in its IDX range. For bespoke discretionary management, Quilter’s annual management charge is 1 per cent on the first £1m, falling to 0.5 per cent over £1.5m, and 0.3 per cent over £3m.
Quilter says its Wealth Select range has outperformed over three years against the relevant Investment Association sectors. Old Mutual Wealth CRA 4 Active Managed has returned 16.43 compared to 13.41 for the IA Mixed Investment 20-60 per cent Shares sector, while the Old Mutual Wealth CRA 9 Active Managed has returned 36.20 per cent compared to 20.56 for the IA Flexible Investment sector.
Brooks also offers discounts for larger portfolios and bigger introducers, but standard charges for its active model portfolios are 0.30 per cent for portfolios on third party platforms and 0.75 per cent for portfolios in its own custody. Bespoke charges, inclusive of dealing, normally range from 0.75 per cent to 0.95 per cent.
Its bespoke portfolios have all outperformed Asset Risk Consultants’ Private Client Indices – used to compare the fortunes of discretionary private client managers – on a cumulative basis over the three and five years to the end of September. The cumulative outperformance ranges from 2.45 per cent for its medium-risk strategy to 13.92 per cent for its high-risk strategy over five years.
Net of charges Brewin Dolphin says its aggressive and growth MPS solutions returned more than 46 per cent on a five-year basis.
Natalie Wright, financial planner, Mazars
We have our own DFM proposition, but we are an independent planning firm and its vital to us we remain one. Our own proposition will be suitable for the majority of clients. We can have a fully joined-up approach and can see what the client calls for in terms of risk and long-term objectives. We fully understand the proposition, capacity for loss, and know exactly what our investment team is doing. That gives clients great confidence we are handling everything, and they get to know us and the team very well.
However, we do have some clients who have specific wants on how the money is invested. I’m not a fan of the term “sophisticated investor”, but we have a few of that kind, who may previously have been investment managers or have experience at a different level to regular clients. They might be offshore, want specific things included in the portfolio or non-mainstream things that we won’t manage, so we use someone external. There will be a smaller proportion going to an external discretionary manager, but they will be the larger level cases.
Some clients come to us just wanting pure financial planning, and for the actual management of the funds they have specifically chosen that to be elsewhere.
Jon Thorpe, financial planner, Balance Wealth
We don’t tend to use DFMs that have their own advisers; we tend to use external fund managers. I used to work for Close Brothers, which has its own funds. I was a tied adviser there but that’s no longer the case. We normally use Parmenion which has various risk graded portfolios. We find for about 90 per cent of people we advise it fits what they are looking for.
We are great believers in passive rather than active investing anyway, so don’t really need to get involved too deeply [with DFM selection].
Of the around 100 DFMs we look into, we believe around a third have financial planners in some form. These are mostly the biggest ones, certainly in the advised space at least, the ones that were fairly large before other advisers got interested in them.
My general view is that advisers going back say seven or eight years were nervous about placing funds with firms that had financial planners. There were fears of poaching and things like that, but I think that was a bit of a red herring; I don’t think poaching business has really been an issue. If you were one of those firms that did do that, word would get out pretty swiftly and they would not get any more business. With things like MPS, a lot of those are on platform, and the DFM probably wouldn’t even know who the client is, never mind having an impact on their financial planning.
Most likely, they will keep the businesses fairly separate, but it’s good for them to have business coming directly to them as well. Plenty of advisers, particularly ones in vertically integrated firms, have got their own investment team. They know what the client wants and in theory it should keep costs down. But others, maybe smaller advisers with more complex clients, are quite happy to introduce to a bigger discretionary manager.
Fraser Donaldson is an investment insight analyst at Defaqto