For a long time bespoke discretionary fund managers have had a place in many advisers’ central investment propositions. The latest data from Lang Cat’s "State of the Adviser Nation" report suggests 45 per cent of financial advisers use a bespoke DFM for some of their clients.
A fully customised investment solution for clients with large portfolios has been a way for advisers to offer a differentiated service for their wealthiest clients, or a specialised output for those with particular investment requirements.
But that solution comes with a significant price tag, which can be higher than many advisers (and their clients) are comfortable with in the current environment.
Of course, this may not bother clients with larger sums to invest. They may see value in the greater attention that comes from a ‘high end’ service and perks like the annual lunch with the fund manager themselves. Some may even take a sense of security from a discretionary manager that comes with a bigger price tag.
The shift
According to Defaqto’s annual DFM satisfaction study, 14 per cent of new DFM business was placed into bespoke services by advisers last year. That number has fallen significantly versus 2021 (26 per cent) and 2020 (30 per cent). So, why is usage declining?
A number of things have changed in the past 18 months, which could explain the waning popularity of bespoke DFMs.
The first is the introduction of the Financial Conduct Authority's consumer duty, which has brought all financial services products that cost significantly above the market into focus. People are becoming more cost conscious as value for money becomes an increasingly prominent part of the conversation.
In this new world, a regulated business offering a service for a much greater price than their peers needs to be able to evidence the extra value offered for those additional fees. It is well understood that bespoke DFM services charge notably more relative to off-the-shelf managed portfolio services and multi-asset fund alternatives.
Can advisers justify the value of that DFM fee on top of their own ongoing charges in this regulatory climate?
The growth of insourcing
Another factor challenging bespoke services is the rise of insourcing (also known as tailored models).
Insourcing, which uses the skills, expertise and heavy lifting of the discretionary manager, sits halfway between bespoke and an off-the-shelf MPS solution.
Through this investment service, discretionary managers design a range of portfolios specifically for an individual advice firm and, in some circumstances, their client segments. Crucially, the client relationship remains firmly with the financial adviser.
While insourcing may not replicate a bespoke portfolio for each individual client, it will be a more tailored approach when compared to an off-the-shelf MPS.
Plus, an insourcing relationship does not come with the lofty price tag often charged by bespoke providers; in fact, insourced portfolios can often be cost-neutral for clients, especially those currently in advisory models constructed by their adviser.
Insourcing essentially bridges the personalisation gap between standard MPS and bespoke DFM, but at limited or zero extra cost to the end client.
