Don’t Believe The DFM Hype

I wrote this piece for the FTAdviser last week.

The latest research by Asset Risk Consultants is an indictment on the value of discretionary fund managers (DFMs).

According to the report, during the past three years the majority of private client discretionary portfolios have failed to match the risk-adjusted returns available from a simple passive strategy. And they didn’t fare any better over a longer timescale. Only 10% of DFM portfolios show systematic out-performance over the market cycle considered by ARC.

While I question ARC’s methodology, particularly the use of a mix of cash and a global equity index as its benchmark, the report does suggest that only a tiny proportion of DFMs systematically add value.

If DFMs do so badly when compared to a simple passive strategy, how much worse will they fare with a sound evidence-based portfolio, for instance one that captures size and value effect on equities?

This is a challenge for advisers. Can you show any evidence that the additional layer of cost as a result of using a DFM is justified? In the end, the regulatory onus is on the adviser, not the DFM, to justify the additional charges.

Abraham Okusanya

Director

Abraham is the founder of FinalytiQ, a research consultancy for platforms, asset managers, and advisory firms. Recognised as one of the country’s leading experts in retirement income, platforms and investment propositions, Abraham has authored several papers on these subjects and delivered talks to the Personal Finance Society, The FCA and several conferences across the country.

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