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January 18, 2011updated 05 Jun 2017 11:37am

RDR-ready discretionary model concerns

Alison Ebbage finds the final form of the arrangement is far from clear cut and the relationship between adviser, discretionary manager and back office needs careful thought.

By Alison Ebbage

The UK Retail Distribution Review will push some advisers to outsource investment management to discretionary managers. Alison Ebbage finds the final form of the arrangement is far from clear cut and the relationship between adviser, discretionary manager and back office needs careful thought.


he UK’s retail distribution review (RDR) could be a shot in the arm for discretionary managers hit hard by clients wanting more control over their investment decisions. A prolonged bear market combined with the requirement to offer advice on whole of market investments from 2012 means many advisers could decide to focus on the core client relationship management, leaving the investment management to others.

Chris Pitt, senior management consultant at 1st Exchange, one of the leading software providers to advisers, says making investment decisions and rebalancing creates lots of administration; it makes sense to outsource the mandate and use some sort of discretionary model.

Low entry model portfolios

Discretionary asset managers are pushing to win that business by offering model portfolios with lower minimum investment threshold than a true bespoke discretionary model. This allows independent financial advisers’ clients access to professional investment management and gives the discretionary managers an economy of scale that is practical and profitable.

“Normally anything below the £50,000 ($78,000) threshold would only really access mutual funds” says Fraser Donaldson, insight analyst at Defaqto.

“Creating centralised model portfolios not only satisfies the ‘whole of universe’ requirement and gives access to things like exchange-traded funds [ETFs] but also means an economy of scale is and thus brings the minimum investment down to about £30,000.”

Evercore significant inroads

Evercore Pan-Asset Capital Management is one discretionary firm that is making significant inroads into this market. It offers seven risk-profiled model portfolios which can be white-labelled if required and has attracted £100m of assets.

Evercore chief executive Christopher Aldous says the idea is a low-margin; high volume business that works for both the supplier and the adviser.

“It allows the adviser to be a holistic financial planner – an integral and important part of the process but as we have no contact with the end investor at all the adviser need not be concerned about clients coming to us direct,” he says.

Remuneration solved?

This model also gets around the problem of remuneration. In the past, an adviser would receive a trail commission for introducing a client to an investment manager. But with the RDR, the adviser will now need to consider where the line is drawn for advice so that they can continue to charge for it.

Donaldson says: “If the adviser wants to proceed with outsourcing they will need to consider how it will fit within the overall planning service and ensure that they can still charge for advice on risk, investment goals, timelines and tax efficiency on an initial and ongoing basis.”

Portfolio fees breakdown

The discretionary manager meanwhile, via their model portfolios takes a percentage annual management charge. The Evercore Pan Asset model, for example, charges 0.25% and the total cost to the client would be 1%, split 0.25% for both the platform and the investment manager and 0.50% for the adviser plus the product charge which for an ETF, for example, would be 0.30% making a total cost of 1.3%.

“It is a smaller margin but it works in this market compared to the direct model where the investment minimums are higher and for a true bespoke discretionary portfolio the client would pay around 1% for custody and 75 basis points to the investment manager making a total of 1.75%,” says Aldous.

The third part of the relationship is with the platform. This is where historically the potential for tension arises with discretionary mangers generally using their own custody and administration provision.

Platform problems?

Pitt says firms like Brewin Dolphin have the investment management team already in place and also often have the custody, execution and administration in place to provide a seamless service on an economy of scale as well.

John Cowmeadow, head of business development at Brewin Dolphin, says the firm was happy to use either its own back-office services or on an adviser’s existing platform and had seen a ‘surge of interest’ in its proposition.

According to Pitt, advisers generally want to retain control and using a platform, rather than the investment manager’s custodian, is one way to achieve this.

Cost is also an issue. Is the bespoke model viable when advisers can use their existing wrap platforms and instead charge clients 0.25%? And can the platforms and the discretionary advisers work together?

Platform business booming

Malcolm Murray, director of sales and marketing at platform operator Transact, says interest from discretionary mangers has increased fourfold over the past year.

“The choices for custody and administration are between a true wealth management vendor which is going to be very expensive or a platform,” he says.

“We can also offer the discretionary manager access to this distinct target community of advisers – we have something in the region of 4,500 on our platform.”

One issue has been the cost of trading on a platform. Aldous says dealing costs can be up to the £15 mark, which he describes as “clearly not viable”.

“We have negotiated £1 per transaction with Eccentric and with Transact we are looking at a bulk dealing cost which will reduce the transaction costs,” says Aldous.

This is a good market for discretionary manager to be involved in on a high-volume basis, if they can get the model, the networks and the relationships between adviser and platform correct. But with the RDR expected to take a few more twists and turns before being finalised, few appear willing to fully commit to this model just yet.

Graphic showing Evercore Pan asset Model


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