Editor’s note: DFMs may be booming, but let’s not forget about conflicts

By Justin Cash

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Oct 18, 2018

There’s no doubt about it: 2018 is a good time to be a discretionary fund manager. Recent weeks have seen more financial results come in, with many big names reporting double-digit growth in assets and monster profit margins.

As the market has grown, DFMs have strived to differentiate themselves in a competitive space. As our cover story this week explores, some are going to significant lengths in terms of bolstering research capacity, reviewing how model portfolios are constructed, and taking another look at how they match asset allocations to off-the-shelf risk ratings. This all bodes well for them.

Yet there remains a strong note of caution on the horizon, because no one appears to have taken a close look at potential conflicts of interest within DFM businesses yet.

While advice arms owned by major providers like Quilter’s Intrinsic and Standard Life’s 1825 are rightly being scrutinised by commentators and the regulator to ensure advisers are not recommending an inappropriate amount of in-house products, the same level of glare has not extended to advisers attached to DFMs.

The fact some large DFMs also have in-house advisers goes largely unnoticed. Brewin Dolphin, for example, has around 420 CF30 registered individuals and is the fifth largest advice firm in the country by that metric. Investec has about 400 and Charles Stanley has some 280.

While Brooks Macdonald’s financial planners give independent financial advice, they are a “major introducer” of funds into the group’s investment solutions, results last month revealed.

The majority of flows into Tavistock’s discretionary solutions come from Tavistock advisers. Tatton Investment Management sits under the Tatton Asset Management group, which also sells support services to advisers through Paradigm Partners.  While it does not actually own in-house advisers, the majority of IFAs that use Tatton also use Paradigm’ support services, and early Paradigm advisers were offered equity stakes in Tatton when they joined the network.

These models can’t escape scrutiny just because the firms don’t actually manufacture the underlying funds.

When we surveyed eight vertically integrated providers earlier this year about what proportion of flows came from in-house advisers, all but one declined to comment.

It is telling that Brooks Macdonald did not actually put a number on its in-house flows. The issue is the same in both cases: transparency.

A straw poll on the Money Marketing website this week showed 70 per cent of you think this disclosure should be mandatory.

It is not just our readers who are seeking reassurance that conflicts are managed: the regulator might soon do too.

Justin Cash is editor of Money Marketing. Follow him on Twitter@Justin_Cash_1

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