Deep Dive – Discretionary Fund Managers: Part 1

What are DFMs and their role in the industry?

Discretionary Fund Managers (DFMs) are increasingly acting as gatekeepers to the flow of retail assets in the investment market. The rise of the outsourcing of client portfolios to DFMs and in particular the exponential growth of model portfolios on platforms has contributed to this. There are now over 100 DFMs available across a range of adviser platforms and around 50% of assets flowing onto platforms now go into model portfolios.

Whilst there are still many financial advisers who build and operate their own model portfolios either on an advisory or discretionary basis, the rise in assets under control of DFMs cannot be ignored.

However, what do DFMs think of the asset managers who provide the underlying funds for portfolios? How do asset managers market to them and are there any lessons to be learned?

A recent research survey carried out by Discus, gives some insight into this and despite a relatively small sample, there was a significant level of consistency across the responses.

Analysis of the feedback highlights an overriding message from DFMs to asset managers. They need to understand the DFM business, customers and processes and then market to them accordingly.

What challenges and opportunities do DFMs present?

The top two challenges identified by the DFMs were legislation and technology. Given the market environment over the last few years with some major pieces of legislation being introduced such as MiFID II and GDPR plus reviews on asset management market, platform market and retirement, the challenge of legislation was hardly surprising.

The rise in the number of players entering the 'robo' advice space and the use of Artificial Intelligence are all potential challenges for those DFMs offering services direct to clients. A recent survey by Sanlam1 identified that 'a third of over-55s and under 45s have used one or more fintech services in the last year'. One only needs to look at the proliferation of disrupters such as Revolut and Goldman Sach's 'Marcus' to see that everyone wants a slice of the investment market. Whilst both these services offer cash options for clients, the collection of their data can only give further opportunities to market investment products to typically high net worth clients.

The introduction of the Pensions Freedom legislation and clients retiring were the key opportunities identified by most DFMs surveyed. Other opportunities identified were: going global, developing new offerings for private clients, better reporting for Managed Portfolio Service (MPS) and negotiating reduced rates with asset managers. This last point being an interesting one as pressure on costs and charges was mentioned numerous times by the DFMs.

How do asset managers get funds into DFM portfolios

DFMs typically have a panel - I.e. shortlist - of funds selected from a group of asset managers. The selection process of how to get on to these panels varies widely across the DFM market and therefore the key message for asset managers that came through was 'get to know us'.

Quantitative analysis is used widely with many DFMs having their own in-house process for this and many (but not all) also still expect to meet asset managers.

When asked about the importance of the fund house in the decision-making process, it was found that the DFMs tend to focus more on the fund and the criteria relating to the fund manager rather than the fund house itself.

Some DFMs require at least a three-year performance record for the fund but strong feelings were also expressed about the credibility of the manager in terms of track record and experience and overall career performance.

A number also mentioned that they want to see the 'whites of the eyes' of the fund managers and are not taken in by well versed sales pitches.

Keys to communication: prioritise meetings

Whilst the DFMs do use social media, they are not influenced by it and are only sometimes influenced by email updates, phone calls, video content and industry events. Communication of this nature might get a fund house, fund manager or fund on the radar but detailed research and meetings with the manager are the key influencers when it comes to decision making.

If taking time out to attend conferences, the themes, fund information and a well-known speaker can be important but the DFMs were all largely indifferent to the brand of both the organiser and the company presenting.

Sales teams need to do their homework

There was an overwhelming view that asset managers don't have a great approach to sales. Firstly there appeared to be a lack of understanding of the DFM industry and the underlying challenges. Complaints were that sales teams don't enquire enough about the DFM business, the types of clients and propositions offered and therefore the approach taken is often standardised. One DFM said 'we appreciate asset managers who do the appropriate work to understand the requirements and nuances of our business'. Another simply said 'they need to know us better'

The DFMs indicated that sales pitches can focus too much on the investment opportunity and recent performance rather than the investment process, management of risk and the tools used. Too often they just 'come in and sell a fund which happens to have been performing well'

The asset managers also don't draw out the differences of their fund, how does this relate to peer offerings and why the DFM should replace any existing funds being used.

Support required

When asked about support, greater transparency of data and the drivers of performance were mentioned numerous times. The DFMs also want proactive contact if anything changes.

Who is known for this?

A number of names were mentioned including Majedie, Baillie Gifford, M&G, Merian Global and Fidelity.

When asked why, responses were typically around the quality and responsiveness of the service delivered. Relationship management was important and needs to be accompanied by an understanding of the business - which supports earlier points made.

Man GLG was specifically mentioned as having a responsive sales team. Boutiques such as Artemis, Lindsel Train and Liontrust were also highlighted as having a specific focus on relationships.

Whilst 80% of the DFMs agreed that the communication received was insightful and helpful, they were still able to suggest improvements. These comments were focused around the tailoring of investment communication, ability to opt in or out and therefore relate back to the point of 'understand our business'

Some specific points made were:

'Understand our fund selection process and only communicate with us if a fund fits that'

'We need information on funds and strategies but get to know us better'

'More asset managers should allow us to tailor or regulate the communication we receive'

The importance of brand 

When asked about the future importance of brand, the DFMs overwhelmingly agreed that their own brand would have greater influence on clients going forward and asset managers brand less influence.

As IFAs need to justify the choice of DFM, it was felt that the brand awareness would help to differentiate DFMs. A view expressed was that clients are now becoming 'savvier' and often perform their own research independent of their adviser hence the requirement for the DFM to have a strong brand.

Equally it was felt that the DFMs were increasingly using smaller, more boutique fund houses and that sometimes using funds from lesser known fund houses added value and hence the brand was less relevant. Clients are less likely to research the underlying holdings within a portfolio so brand was much less relevant than that of the DFM.

Looking forward to ESG

80% of DFMs believe that there has been a shift towards ESG investing and that some investment houses are making significant inroads from a market visibility perspective.

Other themes identified were investment in technology funds and specifically AI and cybersecurity. Bespoke model portfolios and more sophisticated model portfolios were seen as an emerging trend. Passive investing and also a focus on low cost or no cost investing will also continue.

When asked about how asset managers could become more relevant to the DFM business, the cost theme continued. However, the sentiment was that asset managers should not simply reduce costs but ensure that they have an overriding value proposition that focuses on cost, performance and identifies what makes the fund niche or relevant.

Part two will be will highlight the key recommendations as to how marketers could operate differently to improve this relationship.