DFM models on platform Friday 08 Apr 2016

DFM models on platform

This week, Heather Hopkins (@heatherahopkins), Research Director for Platforum, discusses the rise of model portfolios on platform

Discretionary fund management model portfolios on platform are a hot topic – and rightly so. They are a powerful source of growth for platform assets and a sleek route for DFMs to access the wider retail market. 

It is still early days for model portfolios on platform. The first was launched less than a decade ago and platforms (in particular the former fund supermarkets) weren’t built to manage model portfolios, so there are hefty challenges.  

Nevertheless the DFM presence in the adviser market has now reached such a scale and importance that DFMs, advisers, platforms and fund providers need to understand better what is taking place in this part of the investment market. 

Our report on the topic (DFM Model Portfolios on Platform) will be published on Monday (email if you’d like a summary of the findings). In the report we estimate that platform AUA in model portfolios remains under 5% of total adviser platform AUA. But the variance is huge. Some platforms claim to have as much as half of their AUA in DFM model portfolios.  

Flows are another matter. Over the past few weeks, I’ve spoken with a number of platform bosses about models on platform and some gush at the new money that is coming from model portfolios. 

We expect most of the “new money” is off-platform DFM money being moved on platform. But money into DFM models is coming from both ends of the spectrum. Advisers tell us that growth is coming at the expense of multi-managers  (typically used for smaller portfolios) and bespoke DFM (typically for portfolios of over £1m). 

Models in place of multi-managers 

Multi-manager funds are criticised for being expensive. Many advisers tell us they can’t recommend them to clients because the entire portfolio is reported as a single line item on the statement.

As one IFA executive we spoke to in February explained: “I can’t sell the [fund manager X]'s managed solution. Part of the 1% I charge is for providing the client with an investment solution. It is difficult to justify through one fund. I can’t justify the platform fee for a single investment." 

The person lamented that the solution would be an attractive vehicle for the client and likely more tax efficient, but the lack of look-through reporting makes it unattractive. 

Models in place of bespoke DFM

At the other end of the spectrum, advisers tell us that they are using model portfolios in place of bespoke DFM. Managing client assets via the platform gives the adviser control over the client relationship and keeps the DFM at arm’s length. It also makes it easier to change DFMs if they underperform

Challenges of running models on platform 

Our conversations with DFMs sometimes verge on therapy sessions. DFMs have had varied performance in this market: some disappointed while others have clearly succeeded. Yet it is not just about asset gathering. DFMs lament that platforms are not built to run models. The biggest complaints are around fund choice and rebalancing. 

In some cases, limitations in platform offerings and capabilities can lead to differences between a DFMs model portfolio proposition on- and off-platform. Some DFMs are prepared to sacrifice choice, convenience and client control to gain the benefits of using platforms in the adviser market. Others view models on platform as filling the sales funnel for the bespoke or off-platform offering.  

The approaches among DFMs vary widely as does their interest in the market. Some aim to work with a maximum of 2-3 platforms while others are happy to work with as many as will bring in assets.  

Importance of looking under the bonnet 

With a proliferation of choice, we recommend that advisers and platforms perform a thorough due diligence on these DFMs. They need to ensure their commitment for the long-term to models on platform and also their resource commitment to managing these models. It can be intensive, particularly around rebalancing.  

We remain bullish for growth of model portfolio assets on platform. We expect to see increasing flows to these products and increasing resource from platforms to address the challenges they present.