Nine in ten IFAs outsource investment work

Most financial advisers outsource clients’ investment portfolios to discretionary wealth managers, which helps them avoid regulatory risk but raises the cost of investing for consumers.

In a survey carried out by consultancy threesixty of more than 130 companies that offer independent financial advice, 87 per cent said they regularly recommended clients put their money with discretionary fund managers. This has risen from 78 per cent a year ago, when threesixty conducted the same survey.

IFAs are generally qualified to pick investments for their clients. But they need to seek customers’ approval when making changes and keep detailed evidence of doing so. Since sweeping changes in 2013 to how advisers are regulated, the suitability of their recommendations has come under much more scrutiny.

Discretionary wealth managers can work independently, however, changing a client’s portfolio without consulting them first.

According to Finalytiq, a consultant to the financial advice industry, while advisers tend to charge 1 per cent a year, the addition of discretionary management services is likely to push the bill beyond 2 per cent.

Annual charges of this level will cause someone who has invested £250,000, and seen 5 per cent average annual growth, pay £62,000 in fees over a decade, according to calculations by consumer group Which?

Phil Young, of threesixty, said there was nothing wrong with such subcontracting, particularly when the discretionary manager added expertise. He said, however, that clients in this situation might have a case for negotiating lower fees from their IFA.

“The vast majority of IFAs do not discount their own fees when they outsource,” he said.

The most common reason IFAs who participated in the threesixty survey gave for outsourcing investment work was to avoid risk and liability.

“I feel that my clients are having their underlying investments looked after at all times, so I don’t have to worry so much,” the head of one IFA business said.

He added that the discretionary managers he subcontracted to provided “feedback on economic circumstances when I ask [for] them.”

Another said that outsourcing investment management “leaves us to concentrate on wider financial planning issues and reduces the overall risk to us as a firm”.

Abraham Okusanya, of Finalytiq, said that using discretionary managers created “a layer cake of extra charges”, while many customers of IFAs who were sold such a service were not really getting personalised investment management.

He said that while discretionary managers may give a bespoke service to very wealthy people, investors with less than £250,000 might find their cash was instead invested in a model portfolio. These are compiled by discretionary managers, but contain collections of investment funds run by other experts. They are also sold over investment platforms, which carry their own charges.

In the threesixty survey, 21 per cent of advisers said they put clients into discretionary managers’ model portfolios most of the time, while 51 per cent said they did so some of the time.

The average steady growth portfolio run by a discretionary manager has risen by 48.7 per cent in value in the past five years, according to data provider Asset Risk Consulting.

This is roughly in line with the MSCI World index of major global stock markets, but does not include the cost of fees retail investors may have paid financial advisers in order to access the discretionary managers, or any platform fees.