On Investing

Don’t forget the little guys

So much trade press attention is aimed at what the IFA nationals and networks are doing. Are the big guys moving to a restricted model? What do their centralised investment propositions look like? How do these service (or not) the mass affluent, who previously had access to advice but now face being labelled ‘undesirables’ from a profitability standpoint

There is less of a focus on smaller IFA firms, unless it is in the context of consolidation or doubting their viability. The FCA and others have cited a critical mass needed for an adviser firm to run profitably on its own steam.

At one of our Platforum Adviser Roadshows back in April, technical specialist at the FCA Rory Percival commented on how one-man bands would carry the load of new regulatory requirements, questioning their ability to do so without outsourcing some functions. And a recent CWC Research report produced in association with Fidelity FundsNetwork highlights the need for sufficient resource to cover the increased cost of research, compliance and admin, as well as deal with greater complexity of regulation, IT etc. Apparently 13 is the magic number – three managers, eight advisers and paraplanners, and two admin bods.

As part of an ongoing project, we have been speaking to adviser firms across the size spectrum, to better understand how business models are shaping up in the ‘new world’ and which third-party providers have become the biggest influencers in fund selection. It is very much a work in progress, but we do already have a sample of 50 smaller firms we have mapped out in some detail. These have an average of five registered individuals (several are one-man bands) and a median assets under administration of £50m.

platform_660So how are these smaller firms picking funds? Are they outsourcing much of the investment decision-making process, as many in the industry would expect? Showing a perhaps surprising commitment to being whole-of-market, only three firms in this group are restricted and 70 per cent are using three or more fund platforms. Three out of the four only using one platform use Transact, which is certainly one of the most ‘open architecture’ platforms out there.

Two-thirds of the firms in this group tell us they are still picking funds for clients on an individual basis, and two-thirds are utilising model portfolios constructed in-house. In fact, only three adviser firms out of the 50 told us they were outsourcing fund picking entirely.

Looking at the outsourcing going on amongst this lot, they are light on third-party model portfolios; only 16 per cent use these, with OBSR the most popular choice.

It is the use of DFMs that appears to be most common; 42 per cent are calling on their services at least some of the time. Given the number of times Brewin Dolphin is mentioned and cross-referenced with AUA figures, we estimate that it is influencing a maximum of £560m of the total AUA of £5.9bn shared between the 50 firms. Brooks Macdonald looks to be influencing a maximum of £495m, Quilter £221m, and Investec Wealth £170m.

A third of these IFA firms are using multi-manager funds, but naturally those third parties providing the funds are less ‘influential’ than the DFMs in terms of the AUA they command. Architas, Jupiter, Henderson, Vanguard, 7IM and Standard Life feature most strongly, influencing levels of assets that amount to a drop in the ocean when recalling that £5.9bn figure.

The chart illustrates how influential these outsourcing partners are in terms of proportion of the 50 small firms using them, against what that means in assets. So Brewin is Top Gun on both counts. As you would expect, each of multi-manager and model portfolio providers commands relatively tiny amounts of dosh.

Bottom line? The small IFA firms are alive and kicking; they are still big fund pickers and need to be marketed to; and when they are outsourcing this this can entail big sums for providers, not to be sniffed at. We are also starting to have conversations with the biggest adviser firms, so will soon be able to compare and contrast with the investment strategies and specific outsourcing partners they’re using. But for now, the message to the fund management community is this: do not forget the little guys.

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