The adviser and discretionary world

14 May 2020

Every 12 months for the last five years Defaqto has conducted a satisfaction study among advisers to measure the service standards in the discretionary market. Fraser Donaldson shares a few of the results.

This article was originally published in Multi-Asset Review.

Fraser Donaldson, Insight Consultant (Funds & DFM)

As well as measuring the service standards in the discretionary market in our annual survey we also take the opportunity to ask a few supplementary questions to give us a feel for what advisers are doing in terms of investing for their clients.

It is barely five years since pension freedoms flexibility came in to force. Back then, it was accumulate as much wealth as possible to purchase an annuity. Now, alternative investment solutions can be selected in order to provide an income during retirement. While there is some certainty of income with an annuity, investing in risk based alternatives can provide the opportunity for better returns.

This brings a new category of investment objectives. As well as wealth accumulation, there is now wealth decumulation. Similar to our survey in 2018, our latest study indicates that the current split of investment business is split 60/40 in favour of wealth accumulation. We hadn’t asked this question before 2018, but we can be fairly sure that the result would have been a lot closer to 100% five years ago.

Smoke and mirrors

Quite a shift? Not necessarily, probably a bit of smoke and mirrors. Investment that previously may have gone to an annuity may simply have continued with current providers and the income tap turned on. Nonetheless it is interesting to note the weight of wealth being used to fund retirement income and a reminder to asset managers that providing innovative postretirement solutions is a goal worth pursuing, despite the inevitability of retirement pots shrinking over time.

Whether accumulation or decumulation, where does the money go in the discretionary world? Defaqto breaks down the destination into three categories: bespoke portfolio services where custody tends to be arranged directly through the discretionary firm; managed portfolio services where custody of assets is also facilitated through the discretionary firm; and managed portfolio services where custody of assets is with the adviser platform.

DFM satisfaction survey

Our survey indicated that around three-quarters (75%) of advisers made use of a managed portfolio service (MPS), and this was split 60/40 in favour of managed portfolios on a platform. As adviser platforms are at the centre of most advisers’ investment propositions it is not really surprising that the gap between on-platform MPS and direct custody MPS has been growing slowly year-on-year. It is also interesting to note that there are now in excess of 30 discretionary firms (more than 25%) that are only available through an adviser platform. Judging by our ‘preferred providers’ question in the survey, there are a number of these that appear to be slowly gaining traction in the market.

Interestingly, around half of the advisers that use a discretionary service make use of bespoke services and this figure has held steady for the last four years. We can deduce that many advisers see bespoke for the wealthier client, those with more complex financial matters, or aspirational, as wealth increases in managed portfolio services.

So, whatever happened to those little cottage industries run by advisers that spent a lot of time and resource structuring client portfolios using single asset funds? Well, in our survey, a third (32%) of advisers still do some business on an advisory basis – but let’s look a little closer at this figure. Only one third of that 32% still structure client portfolios by using single asset funds – that is only 10% overall. As our survey indicated only 1.5% only do advisory business, this feels a bit like a dying art. The other 62% (3% mysteriously said ‘other’) invest in multi-asset funds.

The above figures offer a likely direction of travel for the industry, which we have been witnessing for a number of years already. Within these approaches there is plenty of choice. Bespoke service managers will structure portfolios based on an individual client’s needs. Defaqto have identified over 1,800 individual MPS portfolios to choose from. There are 340 portfolios made up of passive investments, 240 portfolios that focus on providing a natural income and, more recently, we have seen the launch of 40 ESG portfolios, the majority having been launched in the last year.

If you take into account multi-asset funds, there is plenty of choice out there. But, as ever, it is down to the adviser to select the most suitable approach and portfolio for their client.

Want to learn more?

For further information on this topic:

You might be also interested in other Insight articles.

Share this