Recent editions of the lang cat’s State of the Advice Nation report suggest that usage of bespoke DFMs as part of advice firms’ investment propositions is on the wane.
When hundreds of advice professionals were asked what proportion of their clients were outsourced to a bespoke discretionary service, those who responded ‘none’ rose from 47% in 2022 to 54% in 2024.
Back in 2022, just 4% of respondents said all their clients were with a bespoke DFM, with that figure dropping to zero by 2024.
Of course, there are still cases where clients with specific needs will need a bespoke DFM, or in certain situations it can help with tax planning, but there are likely multiple reasons for this shift in behaviour.
The one standout factor is Consumer Duty: higher fees for no extra outperformance makes for a bad value equation. It’s hard to justify to clients, not to mention the regulator.
However, I think there are other forces at work too.
One is the flexibility and accessibility of other options, such as being able to house portfolios on-platform, particularly within pensions where flexibility is important for retirement planning.
But for many clients, moving from a bespoke service to an off-the-shelf MPS will be too much of a change. This is where we think ‘insourcing’ comes into play.
Insourcing, where an advice business and DFM work together to build portfolios bespoke to that business, which can cater for multiple client segments, is a halfway house between traditional bespoke DFMs and full outsourcing to MPS.
The adviser still has input and, while not specifically built for each individual client, the portfolios are built with the firm’s clients front of mind.
They can also be uploaded to preferred platforms. Portfolios are overseen and rebalanced using the DFM’s discretionary permissions, but the adviser remains in control of the client relationship.
A case in point
One of the advice firms we partner with offers an example of how this works in practice.
They met a high-net-worth client with £3m of investible assets who was using a bespoke DFM.
We will keep identities under wraps, but the client was paying a 1.1% DFM fee (including platform) and 0.7% for the underlying funds. This equated to paying over £50,000 in investment fees alone every year.
As an aside, this particular DFM had also underperformed the market in recent years, resulting in the client losing out twice.
The adviser felt that moving this client from a bespoke service to an off-the-shelf model would have been too jarring and, following a lot of due diligence, decided on an insourced solution.
In this scenario, the adviser still has input on the investments, the portfolios are bespoke to their firm, cater to the client’s needs and are appropriately risk-rated. As a business we are doing the heavy lifting on running and monitoring the portfolios.
The client is now saving £35,000 a year versus the portfolio they were previously invested in.
We believe usage of bespoke DFMs will continue to decline, especially in a post-Consumer Duty world.
Our bet is we’ll continue to see bespoke DFM flows shift to both insourced and more traditional outsourced investment services over the next few years.
Ben Peele is UK managing director at PortfolioMetrix
