Bespoke discretionary fund managers (DFMs) within financial advisory practices is facing a potential decline. Historically a key offering for clients with large portfolios seeking a tailored investment approach, bespoke DFMs are now being scrutinised for their high costs. According to Lang Cat’s "State of the Adviser Nation" report, 45% of financial advisers still use bespoke DFMs, but the significant price tag is becoming harder to justify in today's financial environment.
Ben Peele, UK Managing Director at PortfolioMetrix, who was recently interviewed by Nicola Blackburn from Citywire New Model Adviser, and featured in an article published by FT Adviser, highlights the growing concerns over the value proposition of these services.
While some wealthy clients may still appreciate the personalised attention and exclusive perks that come with a higher price tag, many advisers and their clients are beginning to question whether bespoke DFMs are worth the cost in the current market conditions.
The future of bespoke DFMs seems uncertain as recent data indicates a sharp decline in their usage. Defaqto’s annual DFM satisfaction study reveals that only 14% of new DFM business was directed toward bespoke services last year, a significant drop from 26% in 2021 and 30% in 2020. Several factors contribute to this decline, with the introduction of the Financial Conduct Authority's consumer duty being a key influence.
This new regulatory environment places a strong emphasis on value for money, making it increasingly difficult for higher-cost services to justify their fees. Bespoke DFMs, which traditionally charge more than off-the-shelf alternatives like managed portfolio services and multi-asset funds, are now under greater scrutiny. Advisers must carefully evaluate whether they can justify the additional costs of bespoke DFMs alongside their own fees, particularly as clients become more cost-conscious and demand clear evidence of the value provided by these premium services.
The rise of insourcing, also known as tailored models, is another factor contributing to the decline of bespoke DFM services. Insourcing offers a middle ground between bespoke and off-the-shelf managed portfolio solutions (MPS), allowing discretionary managers to design portfolios specifically for an advice firm and its client segments, while keeping the client relationship firmly with the financial adviser. Although insourcing doesn't offer the same level of individual client customisation as bespoke DFMs, it provides a more tailored approach than standard MPS—often without the high price tag associated with bespoke services.
Insourcing effectively bridges the personalisation gap between standard MPS and bespoke DFMs, offering a cost-effective alternative that can even be cost-neutral for clients, particularly those currently using advisory models. While bespoke DFMs will continue to have their place for clients with specific needs, it's likely that insourcing will become the preferred choice for advisers seeking a more customised solution at a competitive price.
Ben has explored the topic in more detail in his recent interview: