The impact adopting DFMs can have on client relationships

By Mike Webb

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Nov 13, 2018
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A deeper look into the benefits of discretionary fund management in the next instalment of the Rathbones’ Value of DFM report and the impact on adviser business models

Maintaining the quality of client relationships is part and parcel of the financial advice business. You can achieve very little if your clients don’t value the expertise on offer or trust your judgement.

Threatening those relationships is not something any adviser wants to do. However, when it comes to deciding whether to opt for a discretionary fund manager, the fear that those relationships could be irreparably damaged can take over. Some advisers still harbour concerns that they will struggle to prove their worth to clients after transitioning to a DFM, damaging their credibility, relationships and revenue in the process.

The negative perception towards DFM adoption is in no way helped by the distinct lack of research into the real impact an external investment specialist has on those all-important adviser/client relationships.

It is a gap in knowledge that the Rathbones’ Value of DFM report set to fill. The first chapter of the report revealed for the first time the positive impact a DFM can have on adviser business models, while the second sheds light on how client relationships are affected.

With the help of Core Data, we surveyed 100 advisers on the ins and outs of DFM usage to find out what effect it had out in the “real world”, and what exactly held advisers back from partnering with an external specialist in the first place.

Among the main concerns listed by advisers who had not shifted to a DFM structure were fears that an external manager would try to “steal” clients from them, that they would lose control of the investment or value chain and, of course, the cost.

Around two-thirds (64 per cent) also worried about justifying their own fees to clients, believing it would be a struggle to prove their worth if they no longer managed investments in-house.

Until now, these fears have often overshadowed the benefits of a DFM.

However, for the first time we have an idea of the tangible impact a DFM has on client relationships. The survey showed adopting an external manager did not have a damaging effect on an adviser’s credibility, relationships or even revenue. Indeed, it revealed an astonishingly positive change on all three measures.

Quality of client contact, trust and performance all improved for advisers who had the support of a DFM.

Users of DFMs spent more time meeting clients, spending on average a quarter of their week doing so, while non-users reported spending around 19 per cent of their time on the same task.

A significant 45 per cent of users said they conducted more meetings with clients than before taking on a DFM and 55 per cent added that they felt clients trusted them more as a direct result of the shift.

Almost two-thirds of advisers using a DFM said the overall quality of their contact with clients had improved. Concerns about cost still remain, but often fall away once investment performance is taken into account.

Improvement on performance

The survey finally offered proof of the value of paying more for a specialised investment service.

While performance was a critical issue for 46 per cent of non-users that had not taken on a DFM, post-adoption, 72 per cent of advisers said investment performance for clients had improved. The risk/return profiles of clients were better post-adoption, according to 66 per cent of users surveyed, proving the value an experienced and resource-rich external investment manager can add.

The positive impact post-adoption is clear, yet by diving deeper into the survey and separating advisers into “early adopters” and “recent adopters”, we have also found that results consistently improve over time.

Of the early adopters – those that took on a DFM six or more years ago – 80 per cent said that investment performance had improved against 65 per cent of more recent adopters who said the same.

More than half (57 per cent) of recent adopters – those who adopted a DFM between one and five years ago – agreed that the quality of client contact had improved, with the benefits even more acute among early adopters (70 per cent).

The same holds true in levels of trust, with 51 per cent of recent adopters stating clients trusted them more post-adoption, with the figure rising to 60 per cent among the early adopter set.

Both chapters of the Value of DFM report have offered an unrivalled insight into the real-world impact taking on an external investment management has on adviser business models and their relationships with clients.

Perhaps now that myth and perception have been replaced with facts, backed up by advisers themselves, the transition to a DFM model can be an easier pill to swallow for many. The findings of the report should hopefully enable advisers to make the best decision possible for clients, as well as ensuring the DFM industry continues to make changes to provide suitable, tailored services and address any of the lingering fears many might still hold.

Mike Webb is chief executive of Rathbone Unit Trust Management

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