Key message:
- Since 2014, there has been a visible trend in the IFA market of financial advisers choosing to insource their clients’ investment solutions to third parties – usually DFMs using Managed Portfolio Solutions (MPS) or managed accounts via
- Regulation (specifically MiFID II and PROD) have been drivers of this trend, but there are also practical advantages of advisers having more time to dedicate to financial advice and tax planning, which are the value-added elements of their client.
Headlines:
- Advisers are gate-keepers to client relationships in wealth management. Increasingly, IFAs are finding that they would prefer to outsource the investment management of client portfolios to DFMs using MPS or accounts on platforms, so they can focus on the value-added elements of the relationship (financial planning, tax advice).
- There are benefits from a risk perspective of taking this approach. IFAs can evaluate suitability at the portfolio (rather than fund) level, against one risk mandate, which is less burdensome while still allowing them to set the parameters on behalf of the
- The industry has significantly professionalised since the Retail Distribution Review (RDR) yet also faced consolidation as private banks have bought adviser practices. Investment propositions have been enhanced at least partially in response to the pension freedom reforms and as clients start to wake up to the fact that the State will not be able to cover all their retirement
- At present, 46% of IFAs build their own portfolios but regulation is making that burdensome. First, RDR put a more transparent lens on investor outcomes; now MiFID II has increased scrutiny on suitability, product governance and costs and charges. For instance, if there are ten funds in an individual client’s portfolio, each fund has to be assessed against the end-client for suitability. With outsourcing to a Discretionary Fund Managers (DFMs), advisers face a more straightforward process of evaluating suitability at the portfolio (rather than fund) level, against one risk mandate. Therefore, it can help to reduce risk to the adviser to outsource to
- The discussion moved on to note that with thousands of models available, the trend is towards outsourcing investment expertise as advisers focus on areas when they can best add value to the client. In most instances, this will be “life coaching” on financial goals, through the knowledge they have of the client’s.
Conclusion:
- To be well positioned to take advantage of this opportunity in future, wealth management firms will need to focus on:
- client segmentation (with several segments visible even in the post-retiree stage);
- fee compression, as IFAs scrutinise costs and charges intently; and
- substitutions, as advisers will be standing in the clients’ shoes to ensure their portfolios can be personalised to their requirements by specifying these at the
Experts: Steve Purdie, Strategic Distribution Manager & Jennifer Davidson, Head of Platform Enabled Investment Proposition, Standard Life
Facilitator: Tasha Vashisht, Senior Manager, Scorpio
