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Financial advisers switch to customised DFM solutions

12 June 2024

Almost a third of financial advisers now use a bespoke model portfolio service, a survey by FE fundinfo found.

By Emma Wallis,

News editor, Trustnet

An increasing number of financial advisers are working with discretionary fund managers (DFMs) to build bespoke model portfolio solutions (MPS) – as opposed to using off-the-shelf funds for their clients.

Just under a third (31%) of financial advisers responding to a survey from FE fundinfo said they had implemented a custom MPS in partnership with a discretionary fund manager. Another 13% of respondents expect to start using bespoke solutions in the next one to three years.

There remains a cohort of advisers who are unconvinced about the benefits of bespoke solutions, however. A fifth of respondents said they would not use a custom MPS while an additional 36% said they were unsure.

Tax changes, meanwhile, have prompted almost a fifth (19%) of advisers to implement a customised MPS. The capital gains tax allowance has been gradually reduced over the past few years and stands at £3,000 for the 2024-25 tax year.

Other than investment performance, advisers said their priorities when choosing an MPS were: integration with platforms and research tools (cited by 70% of respondents); clear, transparent and client-friendly reporting documents (61%); contact with the investment team (58%); and choice of term lengths and risk profiles (57%). A fifth of financial advisers said they wanted to have input into their DFM’s investment strategy.

Advisers ranked asset allocation as the most important factor for selecting a customised MPS. They also prized fund analysis, portfolio and governance, reporting and communication, portfolio design and analysis, and operational excellence and trade validation.

Ed Margot, head of client investment strategy at FE Investments, said: “The rules of investing and financial advice haven’t changed – empathy and communication are still highly prized. An MPS that can get the message across, can support the financial adviser, and deliver positive outcomes across term length and risk level, is a valued strategic partner.”

There is growing scepticism among financial advisers’ clients about the validity of sustainable investing. This year, 33% of advisers said their clients were unconvinced by environmental, social and governance (ESG) investing, compared to just 11% in FE fundinfo’s 2022 survey. This considerable shift could reflect concerns about greenwashing and/or disappointing investment performance.

Meanwhile, advisers were optimistic about the Financial Conduct Authority’s Consumer Duty, which was introduced on 31 July 2023, with 45% of respondents saying it would have a positive impact on advice provided to clients.

As a result of Consumer Duty, advisers are putting more emphasis on evidencing that clients’ needs and outcomes have been met and are spending more time on suitability assessments and client communication.

Although most (82%) of respondents said Consumer Duty has not changed what they look for in a centralised investment proposition or MPS – for the 18% of advisers where it has been an influence, they are now focusing more on value for money and fees.

FE fundinfo’s survey was conducted between November 2023 and February 2024 and was completed by more than 160 financial advisers.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.