Platform availability is increasingly leading adviser decisions over discretionary fund manager selection, Money Marketing research suggests.
New figures collected from platforms show dozens of DFMs have onboarded in the past year, while experts say the ability to work with advisers’ favoured investment solutions is moving up the agenda for platform bosses.
Platform technology firms like Seccl, which was co-founded by former Ascentric boss Hugo Thorman and recently acquired for £10m by Octopus, and Multrees have set out specifically to help advisers build their own platform solutions for their investment propositions.
Some are predicting a world where application programme interfaces mean that customer relationship management, back office, risk and cashflow systems all link up seamlessly with platforms and discretionary investment solutions.
However, others are questioning the value of opening platforms up to so many different investment solutions, and whether platforms are playing fair when it comes to who gets space in the shop window.
Last month, Money Marketing made a data request to platforms to ascertain how quickly they were onboarding DFMs, what hoops they had to jump through to be successful, and what due diligence was done.
We also worked with consultants Defaqto to compile a definitive list of what platforms leading discretionary services – both model portfolios and bespoke solutions – were listed on.
The responses from platforms showed that each received an average of 14 DFM onboarding requests in the past 12 months. On average, each platform onboarded or is in the process of onboard 12 of these DFMs – meaning the vast majority have been accepted.
The most was Standard Life Wrap with 21, and the least was Seven Investment Management with three. Nucleus received 10 onboarding requests and four have been onboarded. Some are still in the enquiry stage, the company said.Meanwhile, Transact has accepted all 18 of its DFM onboarding applicants, and Ascentric turned away only one of its 15. Of the sample of nine platforms, five accepted all requests.
None of the sample reported imposing any limit to the number of DFMs they were prepared to take on over a given time period. Nor did any say they operated a formal limit on the amount of asset flows the DFM would need to guarantee, or a restriction on what the DFMs could charge through the platform.
There were a number of hints that a certain level of flows would need to be evidenced before adoption was agreed, though. When asked whether it required a guarantee of assets or flows from DFMs in order to be onboarded, 7IM said: “We do require that a reasonable demand is established before setting up a DFM”.
It adds: “Onboarding is based on demand by our intermediary users, and therefore requests from DFMs are declined until sufficient demand has been established.”
Some platforms have few caveats on what DFMs need to do proposition wise before being made available on a platform. Hubwise, for example says that the only requirement is that “the underlying assets (typically funds or listed securities) in the model portfolios must meet our minimum criteria (i.e. we can electronically trade the assets, and we can get daily closing pricing for the assets).”
Ascentric’s only stipulation is not to include manually traded assets, or those with restricted trading frequencies or excessively long settlement periods, while James Hay expects no investment trusts in the models offered.
Others, however, noted DFMs would need to sign legal agreements or change the nature of their dealing. For Nucleus, if a DFM wanted to run the underlying trading themselves, or to be the custodian of the client assets, in those cases it couldn’t proceed with onboarding. FundsNetwork notes that “DFMs must run portfolios based on the asset coverage list we offer for Isas, general investment accounts and pensions, which may require them adapting or onboarding new assets via the due diligence process supported by Fidelity’s fund partners team. “
The majority of platforms say the choice of which DFMs to consider for adoption is driven by adviser demand, with some employing formal methods to collect feedback on which managers financial planners would like to see, and others appearing to take requests on a more ad hoc basis.
Spreading the wealth
Data produced for Money Marketing by Defaqto shows that, as of May this year, there are some DFM providers and portfolios that are only available on a single platform. This is not just in-house options (for example Fundment’s managed portfolios on its own platform) but spans major names such as HSBC Global Asset Management’s global managed portfolio service only being available through Aviva, and independents like Cornelian Asset Managers’ managed portfolio service being limited to Novia.
For some, this may be due to the relatively recent introduction of the service itself, for example Morningstar’s managed portfolios, which the Defaqto research showed were only available on Aviva as of May this year after launching in 2017. But that deal also shows how exclusivity has been a key feature in some cases.
There are also difference between different propositions run by the same manager. For example, Charles Stanley’s multi-manager portfolios are available on 11 platforms, while its PanDynamic model portfolio range is only available on three.
Psigma Investment Management’s platform portfolios cross eight platforms, but its fixed interest portfolio service only spans four.
PortfolioMetrix sits on around 10 platforms, according to the Defaqto data. The firm says it is a deliberate move not to go wider, since elements of its process like allowing clients to choose an income oriented or ethical portfolio whilst still retaining the same risk profile require the platform to be able to integrate these.
PortfolioMetrix UK managing director Ben Peele says "We're not trying to be mass market. Cultural fit is very important for us; we want to work with advisers as partners.
"We are a tech enabled firm, and our offering is genuinely bespoke, not just risk one to five. For that to work, we need the technical compatibility with the platform so you can integrate those investments. Not all platforms can do that. You need to have the API compatibility.
"It's the same approach with platforms as it is when we partner with advisers. For us to grow together, we need to have the capacity to deliver the same output for all of our clients."
Historically, some platforms like Parmenion have been closely linked to the discretionary services that are bound up with them and their parent company, or the prospects for adviser white labelling to create their own investment solution, so would likely have a more reduced panel of DFM options.
However, other DFM services show a very wide range of platform partners. LGT Vestra, for example, had 18 at the time of the Defaqto research, and Waverton Investment Management had 17 and – anecdotally at least – DFM platform adoption has been on an upward trend across all segments of the DFM and platform space.
Chinks in the armour
Yet a debate remains over the usefulness of these developments for advisers, and whether they will end up commercially viable for technology providers when push comes to shove.
As one investment industry consultant says: "The point is, adding DFMs is all well and good, but how much money does it bring you? Does the commercial argument stack up? There's a cost to putting people on; it's not a zero-cost game.
"If an adviser can't do the job with 50 funds, are you sure they can do it with 500? Will 5,000 make any difference?"
With more scrutiny now falling on the DFM sector and new entrants springing up every month, will platforms continue to leave as many doors open for them? One challenger DFM Money Marketing spoke to said that while securing onboarding to some platforms had been straightforward, others had been more problematic, requesting certain asset flows were hit before hosting. While they did not confirm that Standard Life Wrap was one of these, they said that they had found it difficult to get accepted by the platform.
Meanwhile, advisers are also getting more savvy over DFM branding. While managers fight it out to show their active and “bespoke” credentials in an increasingly competitive marketplace, intermediaries are challenging whether some offerings really are tailored, or simply adding charges for relatively straightforward risk-rated model portfolio construction.
One adviser says: “Words like bespoke are important; I would like to see them as clear for DFMs as independent and restricted are for advisers.
“You have to ask: would the DFM be able to review that portfolio and change it in any way? The answer is no, so why are we paying for that?”
Red Circle Financial Planning adviser Darren Cooke says: “The only time you should use a DFM is for bespoke portfolios so that wouldn't be on a platform”
One acquisition broker also tells Money Marketing that outsourcing to multiple discretionary managers across multiple platforms can often be seen as a negative by acquirers who have to work across all these third-party relationships. If your in-house DFM is used by in-house advisers with, say an in-house or white-label platform, the situation can be much less complex, they add.
Others suggest the market for on-platform DFMs is nearing full maturity. Responding to the Money Marketing research, 7IM said that because it already has wide coverage, with close to 50 DFMs offering their portfolios on both an onshore and offshore basis, it does not conduct formal research on what additional DFMs advisers would like to see on the platform.
Lang Cat consulting director Mike Barrett says: “There is no doubt it is a very saturated market.
“There are big differences in platform functionality here. Not just investment range (who can really trade ETFs, investments trusts, etc) but trading and reporting functionality. DFMs I speak with talk about how some platforms are a lot easier to manage their portfolios on than others. Advisers should be considering this stuff.
“If advisers are moving from doing their own thing to outsourcing, this, in my opinion, should trigger a review of their platform due diligence and selection. Is the platform you were using to run your in-house portfolios the most suitable if you are outsourcing? For reasons stated above, and cost, the answer could well be no.
“If outsourcing, another big consideration needs to be who is responsible for what. See the agent as client debate for this.
“I definitely think there is a wider question of just how advisers should and could assess this stuff. The industry is saturated, but very poor about helping advisers compare different solutions.”
The case for the defence
However, it Is beyond doubt that advisers are increasingly looking for help from their platforms and discretionary managers when planning for complex decumulation clients. The modern financial advice profession is building itself around beefed up ongoing servicing, life planning, coaching and sustainable drawdown modelling so clients can live life to the fullest. Getting a discretionary manager that is geared up to manage money in that way and a platform that works with it, not against it, is starting to become a must have, rather than a nice to have.
Aegon chief distribution officer Ronnie Taylor says while the existing Aegon Retirement Choices platform has plenty of discretionary and model portfolio management functionality, the legacy Cofunds system Aegon acquired from Legal & General doesn’t have as much, so the firm is piloting a version with advisers at the moment.
“The discretionary management piece and the whole outsourcing of investment solutions is only set to continue and grow,” he says. “The backdrop is volatility and economic uncertainty – having the right investment solution and being able to be nimble and change that is getting increasingly important.
“A lot of our work with advisers is to make sure they are able to change underlying investments pretty quickly and beef up the support we give to DFMs and how they work with advisers, which can give big added value.
“For the advisers I speak to it starts with the investment solution, whether that’s a DFM, model or anything else. They want to work with a platform that facilitates that, as well as doing all the other clever stuff a platform does.”
Currently AJ Bell only offers DFMs as investment partners via its Sipp, with the money going off platform to the DFM nominee. However, it also notes that it is developing the functionality to offer DFMs on platform with the money staying with the platform nominee.
In the end, in will remain adviser preferences that will dictate the next moves in the market and outsourced investment providers continue to fight it out for shelf space.
Laurence Anthony Associates adviser Kevin Neil
As an IFA I get bombarded by all and sundry wanting to sell me their model portfolio proposition. Quite a number have responded to the question ‘Do you include investment trusts in your proposition” with the answer “No as we wanted to ensure we could get our proposition on as many platforms as possible’. That ends my due diligence on their offering as I fail to see how any proposition that excludes investment trusts in order to suit the requirements of their own business model can be deemed “whole of market”.
Platforms have become a significant route for DFMs to reach the financial adviser market. At the same time, DFMs have benefited greatly in recent years from the increased flow of advised assets onto platforms. Platforum estimates that nearly 10 per cent of adviser platform assets are invested in DFM model portfolios.
Like most platform development activities, onboarding DFMs is led by adviser demand, but some platforms are more responsive than others to such requests. Advisers are reluctant to switch clients from platform to platform and so limit their DFM choice to those readily available to them on their current platforms.
There are also issues with the investment universe available to DFMs on platform which causes a knock-on effect to consistency across platforms. Platforms do not have identical ranges of funds and often hold different share classes of the same fund. In some cases, it might be preferable to use an ETF rather than the equivalent tracker fund and vice versa.
We hear from many DFMs who would like to include ETFs or investment trusts in their portfolios but face certain operational challenges of including them – not least the lack of fractional trading. Some platforms have developed workarounds for these issues and enable DFMs to include ETFs, but it still remains a problem.
Good relationships between platforms and DFMs can also prove fruitful for both parties. One DFM told us about a ‘you scratch my back, I’ll scratch yours’ approach. DFMs talking to prospective adviser firms can point them in the direction of platforms that hold their models, while platform business development managers talking to both existing and prospective firms can promote the services of certain DFMs available on their platform.
Ultimately, platforms remain a key channel for business for DFMs. More advisers have turned to outsourcing to DFMs in recent years and there will be further consolidation of assets onto platforms and into DFM model portfolios. This growing significance of DFM assets will only lead to platforms getting their acts together to better facilitate DFM models.
Andrew Ashwood is senior analyst at Platforum