Investment expert Fraser Donaldson of Defaqto writes a regular column on DFMs for Financial Planning Today magazine, our sister publication and this is his latest column in the current issue to give you a taste of the column. To view Fraser's past columns and lots more content in the magazine register and subscribe to the magazine. If you are not yet registered for Financial Planning Today website do so now to find out more. Registration is free.

One of the tricks to writing a regular article like this (for Financial Planning Today magazine) is to look at one created a couple years ago and see how things have moved on since. I have been reading one from September 2020, and how things have changed is quite an eye opener, writes Defaqto Insight consultant Fraser Donaldson.

Three years ago we were positive about the growing breadth of choice within the DFM MPS market, providing advisers with so many options from which to choose.

What we discover three years later, is that there are no signs of this slowing down, if anything it is accelerating. In September 2020 we counted some 2,076 individual portfolios to choose from. At the time of writing that number has grown to 2,700 portfolios, that’s a 30% increase in just three years.

Of course, it will be no surprise to discover that a large proportion of these new portfolios were Sustainable portfolios (40%) and around 30% of the portfolios were ‘passive’ portfolios. It is also interesting to note that three quarters of the portfolios have been launched on platform, which shows where DFMs feel their best distribution route lies.

While I am broadly in favour of providing a good choice, this avalanche of new portfolios does create a problem for advisers. Given that 30% of the market will have no performance history extending to 3 years (less than three years is probably not a robust indicator), advisers will have to rely on other criteria to support any recommendations.

Obvious avenues would include an assessment of the portfolio management team, such as the success the key individuals have had with other ranges or at other firms. Assessing if the firm appears committed to the portfolio management team, providing resource and the necessary back- office staff. We are aware that there are a large number of portfolios with very little invested in them and the longevity of some must be in doubt.

There are some other fundamental criteria that are key in decision making. Judging whether a new range has its costs set fairly for instance. New entrants will have to get the balance right between a fair cost and survival, until efficiencies of scale kick in. This is why a more subjective judgement on commitment to the market is required.

The structure of the range is important, as this indicates if it is giving choice to the widest number of potential clients.

Usually measured by volatility, it is helpful that each portfolio in the range broadly sticks to a predefined risk profile and that there is a good spread of risk options. This helps ensure  that clients can match their own risk profile to that of a portfolio and they can be reasonably confident that the portfolio continues to do so. Portfolio risk ratings can help here.

I would not wish to see newer portfolios excluded as the market does need refreshing over time, but it does mean a little deeper due diligence.

For as long as I can remember, commentators have suggested that the funds universe is in need of consolidation. Can you really have too much choice?

Fraser Donaldson is Insight consultant at financial data and ratings provider Defaqto and has worked in the industry for several decades. He writes on DFMs and MPSs in each issue of Financial Planning Today magazine. This column is intended for professional advisers only.

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