UK IFAs are more likely to outsource investment management to discretionary fund managers than are their Europe-based counterparts, according to two recent, unrelated surveys of the use of DFMs, on opposite sides of the English Channel.
A just-released report by the global financial research organisation, Cerulli Associates, found that more than two thirds of UK advisers say they are now outsourcing the investment of client assets to discretionary fund managers (DFMs).
Meanwhile, a study reported exclusively in this month’s edition of International Investment found that fewer than half of the European advisers surveyed said they were currently making use of the services of DFMs.
The Cerulli report highlighted that UK retail advisory channel is becoming increasingly divided between large, multi-service adviser and wealth management companies, and small, traditional independent advisers.
Smaller players are more likely to have to outsource investment allocation, but almost 65% of all UK IFAs currently outsource investment assets to discretionary fund managers, the Cerulli report found.
Cerulli said it actually conducted two surveys, in partnership with the UK-based Incisive Media financial publishing house – one of which focused on IFAs, while the other focused on DFMs.
The trend among financial advisory businesses to make use of DFMs is a global phenomenon, industry experts point out, in the wake of some well-publicised investment disasters some advisory firms have found they’d invested their clients in, and a growing regulatory burden that is said to be forcing advisers to spend more time and money on compliance and other matters.
This was reflected in the findings of the study featured in the July/August issue of International Investment, which found that almost 80% of those interviewed cited the increasing levels of regulation, and consequent attention to compliance, was a key factor in driving the industry towards greater use of DFMs.
The study – conducted by the Federation of European Independent Financial Advisers, in association with Investec Wealth & Investment – found that European advisers are less likely than those based in the UK to use DFMs, with just under 50% of those surveyed saying that they were currently making use of DFM services.
However, almost 90% of these European advisers said that they expected the trend among advisers to use DFMs would continue to grow.
In the Cerulli research, entitled Asset Management in the United Kingdom 2016: A Guide to Retail and Institutional Market Opportunities, third-party funds were found to be becoming increasingly popular resources for the DFMs. Around a third of DFMs said they invest more than 80% of their assets in third-party funds, while almost one in four – or 24% – said they invested 100% of their investment capital in third-party funds.
Fewer than 10% said they didn’t make use of third-party funds at all.
In addition, every DFM that responded to Cerulli’s 2016 survey reported at least some level of investment in passive strategies. Around 80% of the DFMs surveyed reported some allocation to exchange-traded funds, 55% stated that they invested in index-tracking funds, and around 30% indicated that they invested in smart beta funds.
“Although few DFMs expect their allocation to passive investments to decrease, the majority do not plan to increase allocations either,” said Laura D’Ippolito, lead author of the report.
“This is good news for active managers targeting this segment, but asset managers can expect fee pressure from DFMs.”
DFMs are also becoming increasingly institutional in the way they approach fund selection, the Cerulli report found, noting that they have increased their levels of due diligence on asset managers and funds – which in turn, it suggested, is contributing to the continued fee pressure felt by asset managers, alongside the growing use of passive strategies.
While UK IFAs were found to be reducing the number of funds on their buy lists because of increasingly rigorous due diligence oversight, meanwhile, the Cerulli researchers discovered that it appeared to be business as usual for UK DFMs.
Lack of change in buy lists
“The majority of DFMs reported having between 20 and 50 managers and funds on their ‘buy’ lists,” Cerulli senior analyst Tony Griffiths, another of the report’s authors, said.
“Around 80% expect the number of managers and funds on their buy lists to stay the same over the next 12 to 24 months.”
As a result, attaining a “best of breed” rating from DFMs is becoming the goal of many a fund manager.
“The key to success in a competitive and increasingly challenging investment environment is to have a well diversified model,” added Griffith.
“This lesson has not been lost on a number of managers that relied too heavily on their success in just one asset class.”
Read the full feature on what advisers want from DFMs in the latest edition of International Investment, out this week. View the edition online here, or follow the links to subscribe to receive a hard copy of the magazine.
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