Outsourcing Discretionary Fund Management: Linear looks at the benefits of an outsourced DFM solution
Due to the increasing demand for model portfolios, the trend for financial advisors to use discretionary wealth managers to manage client’s investments has skyrocketed. A study by Defaqto, a research firm of financial products, reported that 43% of UK financial advisors are currently outsourcing their investment proposition and 73% are using discretionary fund management services. This research is echoed by the Financial Times, who confirms that advisors have been increasingly using DFM solutions over the last decade.
So why do financial advisors seek to outsource to DFM services? James Churchman from Linear Investments shares his views:
Better capacity to manage risks of model portfolios
Advisors are using independent DFM’s more and more to access products that support their business in terms of regularity and to help alleviate time spent on individual client’s requirements. Financial advisors are outsourcing to DFM services to give greater access to investment expertise and reduce the time spent on making portfolio changes. Outsourcing to a DFM can reduce risks for the client and bring efficiency to portfolio management.
This is particularly true for advisory models. They can be difficult to manage. Firms outsourcing this service to a DFM can have comfort in the knowledge the right choice of DFM will offer greater capacity to research and rebalance portfolios while all the time navigating daily changing markets.
Improved relationships with client
It is no secret that service is paramount. Clients want to feel their financial advisor takes the time to understand their own personal goals and ambitions. It is important for a financial advisor to manage an on-going relationship with their existing clients. By outsourcing multi-asset solutions, financial advisers can hand over the daily job of managing money to institutions enabling the advisor to focus on managing their overall client relationships.
This mean that the advisor can sit on the same side of the table as their client and truly hold the DFM to account, selecting and deselecting where appropriate. A financial advisor is less likely to make changes to their own advisory models, perhaps in fear of the client calling into the question the original advice. More often than not this wouldn’t hold true, but outsourcing takes this potential conflict off the table.
In changing and fast-moving markets, advisors need to balance time spent against revenue earned. They are all looking for the best solution that services the client. while earning a satisfactory income. Linear Investment’s DFM offering allows the advisor the freedom to work with current and new clients while all the time being confident that Linear’s team are working to ensure the best service and returns through each model portfolio.
The FT Advisor published research that explained that financial advisors that outsource their investment management for client portfolios can earn a greater salary. The publication shared data stating that ‘revenues for firms that use discretionary fund management were approximately 18 per cent higher at £220,716 per adviser, in comparison to £186,606 per adviser in firms that did not have outsourced support’.
Whereas the above figure would suggest that by outsourcing to a DFM means the client is experiencing an extra layer of service and therefore an extra layer of cost, this must be the case.
James Churchman from Linear DFM explains. “A DFM is of course and extra layer. But what we are seeing more and more in the market place is the IFA off-setting that extra fee to the client by reducing their annual charge by the equivalent. Whereas this might suggest a reduced revenue to the IFA, we often then see an actual increase in advisor fees over a 2/3 year period.
If we take an advisory firm with say £100m under management and recurring income of £1m pa. The advisor choses to outsource to our passive portfolio solution and instead of adding the cost onto the client, absorbs that cost within the financial advisory firm.
The advisor sees a £180,000 reduction in revenue but can easily free up 3 /4/5 weeks per year as there’s naturally less advisory administration. This time can be used to focus on new business areas, whether that’s new advisory investment clients or ancillary services to existing client. The advisor can easily replace that revenue reduction within 12-18 months and from there it’s about exponential growth in their AUM and subsequent asset value.
Choosing your outsourced DFM partner is of course the single most critical part. IFAS need to be in complete control of the customer experience. Agent for investor or agent as client is a great operating framework as it can satisfy the advisory community and alleviate that one true fear of losing your client base. A client base that has taken hard work to build and that must be respected by the discretionary firm.
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