Wealth advisers turn to discretionaries in hunt for fees

Almost two-thirds of wealth advisers are increasingly using discretionary fund managers (DFMs) to help shape their investment propositions, according to research by Scorpio.

The 40 advisory groups surveyed who collectively run more than $8 billion said changes in regulation, with the upcoming retail distribution review (RDR), a desire to target higher net worth clients and pressures on margin protection were key drivers behind the move.

‘The advisers surveyed recognise that a proactive involvement in the investment process will support their ability to charge better fees to their premium clients,’ said Sebastian Dovey, managing partner at Scorpio.

Indeed, pressure on fees has emerged as a key theme, with advisers reporting drops in topline asset-based fee revenues from 150 to 100 basis points over the past two to three years, according to a survey conducted by Scorpio on behalf of Momentum Global Investment Management. This decline in charging capacity is expected to continue, with fees predicted to fall to 75 basis points by 2013 to 2015.

Regulatory changes demanding greater transparency will compel advisers to provide full explanation for fee structuring, which is a core motivation for these depressions in percentage charges, but low fees are not conclusively representative of a better value proposition.

It has already become apparent that independent wealth advisory firms are choosing to outsource DFMs to allow them a more active role in managing their portfolios, but this figure has now surpassed 65%, according to the report, which encompassed survey responses from institutions across the UK and Asia.

‘We have always believed outsourcing is right, and we work with leading discretionary fund managers and organisations to find out how they operate and, where appropriate, to incorporate them into the solutions we offer our clients,’ said Dominic Baldwin, managing director of Xentum Wealth Management. ‘Clients need a totally independent organisation acting in their best interests, and I’m not sure that’s always the case if you go to a discretionary manager who works for a fund company.’

‘Advisers need to do an arm’s length transaction, so they have no allegiance to any fund managers,’ he added.

The movement of higher-end IFAs towards a more active involvement in managing the wealth of their clients will allow them to adhere to transparency requirements while charging more substantial fees to high net-worth individuals or to clients with more than £250,000 in investable assets.

Dovey added: ‘The economics of the wealth management adviser model is such that it is not truly viable for client business with assets below £250,000.’