Riding the DFM sector wave: when will the market reach the top?

Data trawl reveals that discretionary fund managers are hoovering up more assets, while profits remain healthy

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The boom time in the discretionary fund management market is far from over, Money Marketing’s latest research project suggests.

An analysis of financial statements from 10 players from across the sector shows that even during turbulent markets, nearly all of our sample continue to report double-digit percentage growth in assets under management, revenue and profits.

Despite fears that the space is becoming more competitive and pricing pressure is set to bite, there is little evidence of this yet. Most DFMs are reporting slight improvements on their profit margins, regardless of significant investment in extra headcount across the sector.

Delving into the data

A quick word on the numbers: the accounting practices here are notoriously complex and inconsistent. 

Financial reporting periods are also not all the same – some firms report by calendar year, others by standard financial years, and others by their own version of a financial year – so we have just taken the most recent two 12-month periods for each. Some companies are not listed, or are small enough to fall under different accounting rules. 

Some operate partnership structures, while many have group structures that include other business lines outside of discretionary management. Where possible, we have isolated the DFM segment of the business for figures like assets under management, but often figures for profits, director pay and staff numbers are not split out from the overall group, so we have made a note where this is the case. Profit is pre-tax unless otherwise stated, and is taken as underlying rather than statutory, if both are included in results.

Where some statistics like profit margin are not explicitly detailed, we have had to do the calculation ourselves, and have rounded all numbers to two decimal places for consistency.

There are 10 firms listed overall, which we feel represents a cross-section of the market. If someone you want to see has been left out, the chances are it is not deliberate. 

It might just be that we struggled to find a way to make the data comparable based on financial reporting. 

Others, for example Novia’s DFM Copia, were too small to have their own segmental analysis in their accounts, so we could not have included them.


Top DFMs by AUM
Brewin Dolphin – £37.6bn
Rathbones – £33.8bn
Quilter Cheviot – £23.6bn

From old-school to new tools

The headline statistics certainly look positive for the DFM sector. Across our sample of 10 firms, the average increase in AUM was 11.3 per cent.

The average increase in revenue was 12.4 per cent and total profits were up 65 per cent. Key to the success of the top DFMs has been their ability to gradually evolve their business models in recent years. 

Market-watchers say in-house, direct sales have become an increasingly outdated model, as the DFM market has shifted decisively towards serving external advisers.

The more established players in the space, like Brewin Dolphin, Brooks Macdonald, Charles Stanley and Rathbones, still have in-house advice arms to sit alongside their discretionary propositions.

Brewin Dolphin has been particularly successful in increasing its income from financial planning, which was up 18 per cent last year amid a raft of hires into its new high-net-worth offering, 1762 by Brewin Dolphin. Meanwhile, financial statements from Brooks Macdonald note that its in-house financial planners are a “major introducer” of funds into the wider group.

However, the picture is not all rosy for those retaining in-house planners. Charles Stanley continues to make increasing losses on its financial planning arm, while one Rathbones source says that within the firm, provision of financial advice is considered a far less significant part of the business than investment management.

There are also other pressures on a DFM model that relies heavily on recommendations from in-house staff. Where some DFMs show strong flows into their discretionary propositions as a result of recent defined benefit pension transfers from their planners, this is beginning to slow across the market.

However, larger players still appear to be able to take on significant increases in assets without a huge rise in staff numbers. Take Rathbones, which increased the number of investment managers it employs from 273 to 277 last year. Though headcount in the team went up by only four, the firm took on 2,000 extra clients, to reach 50,000.

Other big players have seen funds, revenues and profits increase significantly while actually reducing headcounts: Brooks Macdonald’s was down by 2 per cent and Charles Stanley’s by 4.6 per cent.

Across the five main household names of Brewin Dolphin, Brooks Macdonald, Charles Stanley, Rathbones and Quilter Cheviot, the average increase in profit over their last reporting period was 15.5 per cent.

Success of the smaller players

However, some of the smaller or lesser-known players have seen even faster profit growth (albeit from a lower base). LGT Vestra increased profits from £8m to £11m, a rise of some 37 per cent. James Hambro and Partners’ profits came in at £7.5m when they were £4.6m the year before, a 63 per cent increase, in a year where it also increased its headcount by 17.5 per cent.

James Hambro has a higher profit margin than Rathbones, Brewin Dolphin, Brooks Macdonald and Charles Stanley, while LGT Vestra tops Brooks Macdonald and Charles Stanley – again, while also reporting a 7 per cent increase in staff numbers.

Newer players in the space like Tatton Investment Management have also seen bumper results. Assets under management jumped by a quarter to reach £6.1bn. No firm in our sample reduced the amount it spent on staff.


Top DFMs by revenue
Rathbones – £286m
Brewin Dolphin – £283.4m
Quilter Cheviot – £175.2m

Bespoke build-up

Anecdotally, a real consensus has emerged that DFMs are becoming more bespoke, and have turned their attention up the value chain towards only the highest-net-worth clients.

Brewin Dolphin, for example, has a £150,000 minimum threshold on its managed portfolio service, and a £1,500 minimum charge, but the average portfolio is more like £500,000, head of intermediaries Antony Champion says.

Regardless of size, what has made the most successful DFMs are their links to advisers and giving them exactly what they want, not necessarily the DFM’s own use of in-house funds to drive assets and profits.

Rathbones is a good example of this. Its figures show funds under management in accounts linked to IFAs and provider panels increased by £1bn to £7bn. This is more than the £5bn that sits in its in-house funds.

According to Charles Stanley head of distribution John Porteous, one way DFMs have stayed ahead of an evolving advice market is by developing offerings specifically targeted at decumulation clients post-pension freedoms, including centralised retirement propositions.

He says: “My instinct is there is some way to go yet in terms of DFM market growth because the approach to investment is continuing to evolve. We are seeing that migration from CIP to CRP. 

“There’s a lot more work around safe withdrawal rates, vulnerability and clients in later life. When you are accumulating capital to the point of retirement, it’s just that; it should have fewer moving parts. 

“But if you think about how that’s impacting upon pension freedoms and the sustainability of income in later life against potentially variable market conditions, how do you then improve as a different proposition?”

Are segregated mandates the solution?

As the larger DFMs get even bigger, many are predicting an increase in the use of segregated mandates – funds run exclusively on behalf of a particular client, attempting to marry the best of institutional management with the retail space.

Major advice firms like St James’s Place use this as a cornerstone of their investment offering. But it is increasingly being adopted by DFMs to fill their model portfolio solutions. Data from consultancy NextWealth estimates there are £112bn of assets in wealth manager and DFM segregated mandates, up 17 per cent on 2018 and predicted to reach £190bn by the end of 2020.

NextWealth’s Heather Hopkins says: “The institutionalisation of retail is a trend sweeping across the investment industry. 

“Retail firms are now able to get access to some of the benefits that have long been the preserve of institutional investors, in particular product and pricing… [but] price isn’t the only factor. Use of segregated mandates can also drive efficiency and allow for greater control and oversight over portfolios.”

The larger players in the DFM space – particularly as the platform market continues to undergo pricing pressure – have made the argument that they can get slightly better deals with managers and platforms because of their size, and running segregated mandates should only increase this potential.

Brewin Dolphin, for instance, now has £3bn in its managed portfolio service. The firm runs segregated mandates within its active range. Segregated mandates allow the firm to rebalance monthly across the 12 platforms on which its MPS is available, and it says this helps to reduce friction within the platforms. It also says, because the assets effectively still sit with Brewin, the firm has far greater clarity over the proposition. 

Hopkins notes that “large vertically integrated wealth managers are able to access investment managers for a fraction of the cost of buying an off-the-shelf open-ended investment company”, and while some can take a fee to add to their profit margin, players like Brewin have passed cost savings to clients.

Money Marketing understands that other DFMs are also looking at adopting segregated mandate models.

Some DFMs have strong institutional businesses, but private client work seems to be the way they are leaning. Take LGT Vestra, for example. The firm has £3bn in institutional AUM, but this is dwarfed by private client assets of £8bn, our accounts analysis reveals.


Top DFMs by profit
Rathbones – £87.5m
Brewin Dolphin – £86.5m
Brooks Macdonald – £18m 

Piling into passives

DFMs have not been immune to the greater transparency brought about by Mifid II rules. Some commentators believe that advised clients could eventually shy away from outsourced investment management once the size of the bill for it becomes clearer.

While the trend towards life planning is a strong one, with many more advisers electing to use a DFM, model portfolio, or get their own discretionary permissions to focus on financial planning, market- watchers have also pointed out that DFMs may need to adapt to a move towards passive investing and cost consciousness, in the next stage of their evolution.

Do the charges stack up if a DFM is running a passive portfolio on behalf of an adviser? Some argue that when the DFM is buying the underlying funds at, say 0.15 per cent, but retaining a charging structure similar to the one it employs for active discretionary management, it may not be adding sufficient value.

Some DFMs may evolve new charging structures to cater for advised clients seeking more passive solutions. 

This strengthens the idea that, as we move forward, advisers may start to shift away from a model where they employ a select few DFMs for the vast majority of clients that hit a certain asset level. They may instead call upon a panel of DFMs, pairing the right client with the right provider and the right portfolio manager.

A more rigorous segmentation exercise would sit well not only with the FCA’s wider suitability rules, but with new European Union directives like Prod and Mifid II, which aim to ensure solutions are tried and tested for the unique characteristics of the client banks they are intended for. 

Conversely, tighter rules on proving investments are appropriate may soften a key advantage of DFMs: that they were free to run investments as they saw fit, provided they stayed within the mandate given. Dobson and Hodge financial planner Paul Stocks says: “Given regulation, I wonder how ‘discretionary’ a DFM can really be. The more centralised they become, the less discretionary, and therefore the more like a multi-asset fund. It is more likely that DFMs probably have relatively rigid restrictions on how they manage portfolios via committee, and therefore how much discretion is there at the local manager and client portfolio level?”

Adviser View: Rebecca Aldridge
Managing director, Balance: Wealth Planning

I’m not surprised to hear the positive headlines on inflows and headcount. 

I think there has been a real movement towards DFMs over choosing funds and I think that will continue – but I am surprised about the profitability, because I think they’ve been under quite a lot of pressure to keep costs down.

With more people looking to invest passively, it becomes difficult to justify the usual charges as a DFM when you’re doing almost nothing and just acting a bit like a platform. 

When we looked at DFMs, because we are mainly a passive investment firm, and told them we wanted to invest that way but wanted something a bit more bespoke than a model portfolio, they were really defensive and challenging of our approach. That’s not on. I really hope there will be some firms that will be more dedicated to passive solutions because the market does need them.



We know there are plenty of DFMs out there, but we’ve got no plans on becoming a consolidator. Because of the nature of purchases, we have done very few, and those would be slowly integrated into the business. We don’t do any venture capital trusts or enterprise investment schemes. We’ve got 27 research analysts on top of our investment managers, so we’ve got a lot of resources to create a proper investment framework. 

It flows from the managers down into the models, and is more about providing options to the intermediary; if they think they should use managed portfolio solutions rather than bespoke, we are pretty relaxed about that.

We are on 12 platforms because advisers want choice. We’re still trying to get on to more platforms, and there are a couple we are talking with at the moment. We don’t get involved with financial planning teams and what platforms they use. 

We know that when advisers move to us, some of their assets will be on other platforms.

We are all investment managers trying to do the best thing for the client. That will be down to the tactical and strategic asset allocation that’s going to make the difference. We all use exchange-traded funds, direct stocks and investment trusts, so the way we place things is more about our service and research. We’ve got 18 business development managers and keep trying to do as much as we can to remain relevant. We’ve got 30 offices and have decided to put investment managers in the majority of them.

Having done the suitability, if the adviser believes utilising a DFM is right for that particular client, we are not going to second-guess that. 

We will just work with advisers to ensure they are providing the right investment solution and it’s suitable for the risk. Advisers often appreciate the fact they have a true investment specialist working alongside them.

Cost is always a challenge. We believe we offer a competitive rate, but I think the whole industry is under pressure. The overall price of the discretionary service is dependent on the assets you are holding within it, but we are constantly looking at the pricing.

Everyone has to cover costs, and there are more costs involved now just to continue to provide the level of service we want to. In the past, discretionary managers said they could run £50,000 investors, but some managers have now grown up to understand income and other requirements better.

Antony Champion is head of intermediaries at Brewin Dolphin


Highest profit margin
Tatton – 53%
LGT Vestra – 36.5%

Lowest profit margin
Smith and Williamson – 17.3%
Charles Stanley – 8.8%

Head to head: What must DFMs do to stay ahead of the curve?

Bella Caridade-Ferreira
Old models under threat from new breed of DFMs

If you go back a few years, DFMs were attracting a lot of their own direct business, but there has been a massive shift in business models away from the traditional practice. As a lot of the clients are getting older or dying, and younger generations are coming in, they don’t want the wood-panelled floors and cushioned carpets. “Come in and have a cup of tea” isn’t going to work. They just aren’t going to go for that type of service; they want something more modern.

DFMs got a new lease of life when they started doing business for advisers, but advisers are waking up to the fact that they are the clients; they are the ones with the strength here. They are charging them a lot of money and DFMs are going to have to justify those expenses. A lot of advisers are doing stuff like setting up their own DFMs or working more closely with a regional manager that really understands them and the local area. It’s going to be much more about knowing your customer, and in the long term, well-established and reputable advisers who know what clients need and the solutions will start to think, “we can do this ourselves”.

New types of DFMs are coming out of advice firms, and that’s where some traditional DFMs are going to struggle. I see growth in the smaller, boutique end, which will differentiate by being transparent and putting all its numbers up. 

The older ones hiding behind saying people don’t want to know aren’t as transparent as they could be. A lot of the new companies coming up certainly aren’t like that. There is also going to be pressure from the likes of robos as some have big entry points for people with a lot of assets, and some of them could run cleaner businesses with better returns. 

Bella Caridade-Ferreira is chief executive at Fundscape

Gillian Hepburn
Advisers and managers must have clear roles

For me, it just feels like it’s all about service. Whenever I did research in my consultancy days, there was never anyone who was absolutely awful performance-wise. There were a few differences but, generally, there wasn’t a big performance differentiator. MPS in particular can probably be quite similar, so what differentiates one from another?

In terms of bespoke, there are still fundamentals of building a portfolio that are different. If you are positive towards a stock, say, you are going to include it, because why would you include it for some people and not others? Bespoke differentiation will come down to a real understanding of what the client wants. Capital gains tax, income, intergenerational transfers – how do you make sure that full tax planning is nailed in place? The investment process does come up, but I think there are other things that make more of a difference in reality. Because it’s not about the process, it’s about the outcome. It’s about how you position portfolios and what you’ve got in them. 

If you are purely using funds as opposed to direct equities, yes, you have trading and dealing costs, but the cost of portfolios might be cheaper. You need clear roles and responsibility between all parties. When does the adviser responsibility stop in terms of suitability, and where does that end with the DFM taking responsibility for the mandate and being clear on how they are going to be managing the money? Bespoking comes back into it; you have got to have the right investment to achieve the client’s mandate, which isn’t necessarily always investment-related.

Gillian Hepburn is intermediary solutions director at Schroders


Biggest staff increases
PortfolioMetrix – 21.9%
James Hambro – 17.5%
Tatton – 15.4%
LGT Vestra – 6.9%
Smith and Williamson – 4.9%

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