With the dust settling on the introduction of the new consumer duty regulation, what does the future hold for DFMs? Is it likely to be business as usual or will we see an increased squeeze on propositions as financial advice professionals get to grips with implementing a rock-solid framework for showing the FCA they are compliant?
We know from our research that the consumer duty is accelerating advice firms to focus on cost, to seek to reduce risk and improve efficiencies.
We are seeing particular growth in tailored models as firms tighten their propositions and focus on delivering a cohesive and consistent customer journey.
In interviews for a guide we recently produced on behalf of Charles Stanley (An Adviser Guide to Working Effectively with Investment Partners) we found four main reasons that advice firms might choose to work with an external partner to deliver their investment proposition:
- Firms are seeking to enhance the value they deliver to clients by concentrating on where they can do more to understand and meet client needs. That means reducing time spent on other tasks such as rebalancing, fund switching, reporting.
- Firms that would identify themselves as more planning-led than investment-led are decoupling investment performance from their adviser-client relationship.
- Working with an investment partner reduces investment risk for the adviser.
- A good investment partnership brings access to research and resources, including in specialist areas such as impact investing.
Several interviewees suggested that these factors are increasing in importance as a result of consumer duty. In some cases, this was because of root and branch reviews. In others, it was because of the increased focus on delivering and evidencing value for clients.
Be prepared
DFMs can help demonstrate to advice firms that they are the perfect partner if they prepare effectively. What might help with this is recognising the main drivers that are in play for advisers to make up their minds.
The Charles Stanley guide we produced highlights 12 points that advisers are looking to tick off their due diligence lists. These are:
1. Financial strength – the top requirement for any DFM.
2. Cultural fit with the advice firm.
3. Platform availability.
4. Investment style and process (interesting that this didn’t make the top three).
5. Passive v Active: advisers are looking for clear justification of the exclusion or inclusion of passive funds in client portfolios.
6. Cost, although at the due diligence stage, it becomes more about the trade-offs between cost and other added value from the partnership.
7. Integrations – something that is becoming increasingly important as advisers look to streamline processes and efficiencies.
8. Tailoring. Tailored models are a key area for growth, particularly regarding the consumer duty.
9. Distinction. Advisers are looking for more than off-the-shelf propositions.
10. Sustainable/responsible investing. This is an area that some advisers think active managers can add real value.
11. Reporting. Customisable options are valued.
12. Client ready. Advisers want DFMs who can articulate a clear and consistent philosophy, making it easier for advisers to help clients understand what they are paying for and whether it represents good value.
There’s no doubt that the consumer duty is making advisors reassess their current arrangements and DFMs should expect some turbulence ahead. Having a plan that recognises and meets the advice firm decision-making drivers over the coming months will, in my opinion, be the difference between DFMs winning and losing business.
