DFM and investment performance

Offering positive returns on an investment pot is, ultimately, the key area in which advisers can keep their clients happy and the report, using independent research compiled by CoreData, offers some interesting findings.

According to the survey ¹, nearly three-quarters (72%) of the ‘adopting’ camp of advisers reported that the investment performance of their clients had improved since taking on an external manager to run their portfolios. In addition, 66% of adopters said the risk-return profile of their clients had positively changed since adoption. However, it is important to note that not all advisers reported improvements in either performance or their clients’ risk-return profiles, as outcomes will invariably differ between DFM houses, strategies employed and so on.

In fact, more than half (55%) of advisers surveyed listed losing control of the investment or value chain as a key barrier to adopting a discretionary fund manager at all, perhaps fearing that the shared investment goals they had for clients might be compromised by involving a third party and even damage performance.

The reasons for improvements in the portfolio value and risk profiles reported by some advisers will vary on a case-to-case basis, but could be, in part, down to the levels of investment personalisation that can be offered when employing the services of a discretionary fund manager. Almost a third (30%) of advisers surveyed for the report said that the level of personalisation on offer was a primary factor in choosing to take on DFM services.

In addition to discovering the differences between adopting and non-adopting advisers, the Value of DFM report also tried to gauge the impact of adoption over time. When it came to investment performance, the results of the survey found some advisers experienced a correlation between the length of time post-adoption and improvements in returns and risk. Of recent adopters – those who took on DFM between one and five years ago – 65% said client portfolio performance had improved. However, among earlier adopters – those who took on DFM more than five years ago – 80% reported improvements. In addition, nearly three-quarters (73%) of early adopters reported an improvement in risk-return profiles for clients against 59% among the more recent adopters. These figures indicate that a portion of advisers experienced more positive outcomes from adoption of a DFM the longer they worked with them, however there is no guarantee this will always be the case in future.

Given the importance of investment performance for advisers and clients, the report offers an insightful assessment of the impact of DFM adoption on portfolios. Higher levels of personalisation and the possibility of improved risk-return profiles or investment performance are all welcome advantages that could potentially result from working with an external manager, while it is no guarantee of any of these things, the report suggests that at least some advisers have reaped the benefits since adopting a third-party investment manager.

Download the third chapter of our DFM research report - The value of discretionary fund management.

¹ CoreData survey conducted in 2018: sample size 67 Users and 33 Non-Users of third parties.