TREND IN DEMAND FOR DISCRETIONARY FUND MANAGEMENT (DFM) – CHANGING BUSINESS MODELS
71.3% of advisers in the Middle East are offering or considering to offer DFM services.
Advisers need to recognise that the key drivers for change represent opportunities to implement new advice models if they are to survive in this new world.
Reducing risk by modernising the investment process
Getting expert investment advice is probably the most common reason for clients to see an adviser. But for financial advisers, it could also be the most risky and time-consuming aspect of doing business. Something that regulators are beginning to focus on is how the suitability of investment offerings is demonstrated and recorded. This evidence can help ensure that any future challenges to investment performance can be refuted where the task has been correctly and diligently completed.
Many firms have found that having a robust, repeatable and recorded advice process to underpin client recommendations not only reduces the potential risk to their businesses, but also helps to keep their clients’ investments on track.
Fund selection: building a portfolio
Spreading risk is one of the most important principles of investing, not only between several different investment types (i.e. the asset classes) but also between different fund managers depending on their approach.
The decision about which asset classes to invest in to achieve the return the client wishes to receive should link to their attitude to risk. Investment experts use sophisticated tools to determine the right asset allocation for clients matched to their risk profile.
Choosing the right funds within each asset class is also a complex task. With thousands of funds available in the market place, analysing each one and doing due diligence takes time and expertise.
That’s why more and more advisers are choosing to partner with investment experts to source solutions whilst remaining in control of the advice process as a whole. This gives them the opportunity to spend more time with clients to discuss or review their broader financial planning needs. It will allow the adviser to focus on the areas of real value: understanding the client and their financial planning needs and helping them get to where they wish to be in life.
There are many investment solutions available to advisers looking to delegate some or all of the investment process to an investment professional: multi-asset funds, select fund ranges, model portfolios and discretionary services – where an investment professional, usually a discretionary fund manager (DFM), provides a more bespoke investment service to the client. It can be more effective for the entire investment process to be outsourced to the DFM.
MEIP 2016 found that advisers in the Middle East are increasingly outsourcing the investment process to professionals, with 54.9% of advisers offering DFM services, while another 16.4% are considering doing so.
As for selecting a DFM, 76.9% of advisers ascribe first- or second-level importance to each of the following attributes: independence (in the sense that the DFM provider does not invest in its own funds), the capacity of the DFM provider to research other managers, and past performance.
From an investor’s point of view, our own research* shows investors agreed that DFMs offered two key advantages – both of which will help provide comfort in volatile times:
- Matching risk – 70% of investors agreed that the key benefit of a DFM was matching investment portfolios to their individual level of risk.
- Protection – 63% of investors were attracted to the tight controls DFMs have in place to help protect against losses.
* UAE Investor Research 2016, Old Mutual International
Building a sustainable business
A growing number of financial advisers are recognising the effect that regulatory change and shifting client expectations will have on their business. Advisers understand they will need to adapt their business if they are to thrive in this new world. Building a centralised investment process is a key step in an adviser’s transition journey as they evolve their business model to become future fit.
The decision to outsource investment management, and partner with investment experts, can help advisers stay in control of the advice process, spend more time with clients, and help reduce the risk of making poor investment choices. All these are important considerations in building a sustainable business.
