The UK retail advisory channel is increasingly divided between large multiservice advisor and wealth management companies and small, traditional independent advisors. Smaller players are more likely to have to outsource investment allocation, Cerulli Associates‘ Asset Management in the United Kingdom 2016: A Guide to Retail and Institutional Market Opportunities report finds. Cerulli conducted two surveys in partnership with Incisive Media, one targeting IFAs and the other targeting DFMs. This research found that nearly 65% of UK IFAs currently outsource investment assets to DFMs, which are also a growing target for asset managers.
In turn, nearly one-third of DFMs invest more than 80% of their assets in third-party funds; 24% invest 100% in third-party funds. Fewer than 10% invest in no third-party funds at all.
In addition, every DFM that responded to Cerulli’s 2016 survey reported at least some level of investment in passive strategies. Some 80% of DFMs reported some allocation to exchange-traded funds, 55% stated that they invest in index-tracking funds, and only 30% indicated that they invest in smart beta funds. “Although few DFMs expect their allocation to passive investments to decrease, the majority do not plan to increase allocations either,” says Laura D’Ippolito, lead author of the report. “This is good news for active managers targeting this segment, but asset managers can expect fee pressure from DFMs.”
DFMs are increasingly institutional in the way they approach fund selection, having increased their levels of due diligence on asset managers and funds. This is contributing to the continued fee pressure felt by asset managers, as is the use of passive strategies.
Whereas IFAs are reducing the number of funds on their buy lists because of increasingly rigorous due diligence oversight, Cerulli’s survey indicates that it is business as usual for UK DFMs. “The majority of DFMs reported having between 20 and 50 managers and funds on their buy lists,” says Cerulli senior analyst Tony Griffiths, another of the report’s authors. “Around 80% expect the number of managers and funds on their buy lists to stay the same over the next 12-24 months.”
Attaining a “best of breed” rating from DFMs is every manager’s goal. Cerulli’s research shows that Invesco Perpetual and Standard Life have not only achieved this-in alternatives and multi-asset respectively-but won topfive rankings across two asset classes.
“The key to success in a competitive and increasingly challenging investment environment is to have a well diversified model. This lesson has not been lost on a number of managers that relied too heavily on their success in just one asset class,” Griffiths adds.