The UK Retail Distribution
Review will push some advisers to outsource investment management
to discretionary managers. Alison Ebbage finds the final form of
the arrangement is far from clear cut and the relationship between
adviser, discretionary manager and back office needs careful
thought.
Go deeper with GlobalData
he UK’s retail distribution review
(RDR) could be a shot in the arm for discretionary managers hit
hard by clients wanting more control over their investment
decisions. A prolonged bear market combined with the requirement to
offer advice on whole of market investments from 2012 means many
advisers could decide to focus on the core client relationship
management, leaving the investment management to others.
Chris Pitt, senior management
consultant at 1st Exchange, one of the leading software providers
to advisers, says making investment decisions and rebalancing
creates lots of administration; it makes sense to outsource the
mandate and use some sort of discretionary model.
Low entry model
portfolios
Discretionary asset managers are
pushing to win that business by offering model portfolios with
lower minimum investment threshold than a true bespoke
discretionary model. This allows independent financial advisers’
clients access to professional investment management and gives the
discretionary managers an economy of scale that is practical and
profitable.
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By GlobalData“Normally anything below the
£50,000 ($78,000) threshold would only really access mutual funds”
says Fraser Donaldson, insight analyst at Defaqto.
“Creating centralised model
portfolios not only satisfies the ‘whole of universe’ requirement
and gives access to things like exchange-traded funds [ETFs] but
also means an economy of scale is and thus brings the minimum
investment down to about £30,000.”
Evercore significant
inroads
Evercore Pan-Asset Capital
Management is one discretionary firm that is making significant
inroads into this market. It offers seven risk-profiled model
portfolios which can be white-labelled if required and has
attracted £100m of assets.
Evercore chief executive
Christopher Aldous says the idea is a low-margin; high volume
business that works for both the supplier and the adviser.
“It allows the adviser to be a
holistic financial planner – an integral and important part of the
process but as we have no contact with the end investor at all the
adviser need not be concerned about clients coming to us direct,”
he says.
Remuneration
solved?
This model also gets around the
problem of remuneration. In the past, an adviser would receive a
trail commission for introducing a client to an investment manager.
But with the RDR, the adviser will now need to consider where the
line is drawn for advice so that they can continue to charge for
it.
Donaldson says: “If the adviser
wants to proceed with outsourcing they will need to consider how it
will fit within the overall planning service and ensure that they
can still charge for advice on risk, investment goals, timelines
and tax efficiency on an initial and ongoing basis.”
Portfolio fees
breakdown
The discretionary manager
meanwhile, via their model portfolios takes a percentage annual
management charge. The Evercore Pan Asset model, for example,
charges 0.25% and the total cost to the client would be 1%, split
0.25% for both the platform and the investment manager and 0.50%
for the adviser plus the product charge which for an ETF, for
example, would be 0.30% making a total cost of 1.3%.
“It is a smaller margin but it
works in this market compared to the direct model where the
investment minimums are higher and for a true bespoke discretionary
portfolio the client would pay around 1% for custody and 75 basis
points to the investment manager making a total of 1.75%,” says
Aldous.
The third part of the relationship
is with the platform. This is where historically the potential for
tension arises with discretionary mangers generally using their own
custody and administration provision.
Platform
problems?
Pitt says firms like Brewin Dolphin
have the investment management team already in place and also often
have the custody, execution and administration in place to provide
a seamless service on an economy of scale as well.
John Cowmeadow, head of business
development at Brewin Dolphin, says the firm was happy to use
either its own back-office services or on an adviser’s existing
platform and had seen a ‘surge of interest’ in its proposition.
According to Pitt, advisers
generally want to retain control and using a platform, rather than
the investment manager’s custodian, is one way to achieve this.
Cost is also an issue. Is the
bespoke model viable when advisers can use their existing wrap
platforms and instead charge clients 0.25%? And can the platforms
and the discretionary advisers work together?
Platform business
booming
Malcolm Murray, director of sales
and marketing at platform operator Transact, says interest from
discretionary mangers has increased fourfold over the past
year.
“The choices for custody and
administration are between a true wealth management vendor which is
going to be very expensive or a platform,” he says.
“We can also offer the
discretionary manager access to this distinct target community of
advisers – we have something in the region of 4,500 on our
platform.”
One issue has been the cost of
trading on a platform. Aldous says dealing costs can be up to the
£15 mark, which he describes as “clearly not viable”.
“We have negotiated £1 per
transaction with Eccentric and with Transact we are looking at a
bulk dealing cost which will reduce the transaction costs,” says
Aldous.
This is a good market for discretionary manager to be involved
in on a high-volume basis, if they can get the model, the networks
and the relationships between adviser and platform correct. But
with the RDR expected to take a few more twists and turns before
being finalised, few appear willing to fully commit to this model
just yet.
