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Game changing pricing: implications for the DFM market

Yesterday I had the pleasure of attending a launch event for the FAM Assetfirst Discretionary Portfolio Service at the stunning Landmark Hotel in London. Prior to my arrival I had an inkling that the 'newest kid on the DFM block' would adopt a somewhat controversial approach to pricing. I didn't appreciate the full extent of it, however, until I heard the words "DFM fee-free portfolios". Wow.

You read that right. The client does not incur any charge whatsoever for the management of their DFM portfolio(s). So, how exactly does it work? Just like any other service an advice firm buys in - like back office software or cashflow planning tools - Assetfirst has assigned a monthly subscription fee to their DFM service, which can be accessed for just £800+VAT per month.

 

Could this pricing strategy change the game?

Quite possibly. We're already seeing movement in the pricing strategies adopted by financial advisers, away from ad valorem fees toward fixed fees. In the platform space, the announcement by Interactive Investor in April of its new 'Netflix pricing' sent ripples across the market. Could the DFM sector follow suit?

In order to see mass adoption of this approach, massive changes are required to increase efficiency and drive down the costs of delivering traditional DFM services. This is where I see blockchain adding value, cutting out cost, alongside the automation of standardised processes, which will cut costs even further.

In my view, if you're a DFM operating in today's market you need to be investing in tech. If your attention is elsewhere you risk falling behind, faced with increased price pressure, and as more innovative fixed price services come to the fore.

Read on for an overview of the new Assetfirst proposition...

 

The Assetfirst investment philosophy

The team at Assetfirst believe that the only true indicator of consistent performance is cost. Many studies have shown that low cost funds tend to show greater levels of consistent outperformance over longer terms and the Assetfirst investment proposition embraces this research.

In 2008 Assetfirst designed and launched a range of low-cost, risk-graded, multi-asset portfolios that could be held within any of the tax favoured wrappers on most platforms. The portfolios range from Defensive through to Aggressive and in the almost 10 years since launch they have all delivered returns within the parameters set for them.

This comes down to the fact that the portfolios are constructed using predominantly low-cost index tracking funds rather than more expensive actively managed funds. The table below shows the current asset class holdings within the Assetfirst Balanced Portfolio.

How have the portfolios performed?

The chart below shows the performance of the portfolios compared to the average of similarly risk-rated funds available in the UK market (UK RTMA).

 

The chart shows all the Assetfirst Portfolios outperforming their respective benchmarks in terms of total return. More importantly, you will see the consistency of the returns. A portfolio that consistently performs above average shows that the overall return is not a result of one period of significant short-term outperformance, which can obviously be misleading. This focus on consistency is vitally important when a portfolio for generating a regular income stream.

 

Risk vs. reward

The chart below shows the performance of the portfolios (yellow) against their relevant RTMA sector averages (red) and RTMA sector constituent funds (blue) over the last nine years. The x-axis shows risk (or volatility) and the y-axis shows total return over that time period.

 

All the portfolios sit on or close to the upper edge of the chart, which means they have all delivered some of the highest returns over the last 9 years for any given level of risk. The only fund to produce higher returns than our Aggressive portfolio was taking a substantially higher degree of risk than Assetfirst believed to be prudent over the time period in question.

As you can see, the portfolios are doing exactly what they were designed to do - provide maximum return at minimum risk - and Assetfirst's focus on reducing investment cost is a major contributing factor to that outcome.

To find out more about the Assetfirst proposition please visit the website at assetfirst.co.uk.

 


This article was originally created for the DISCUS website (Discretionary Investment Services Coming Under Scrutiny), an information resource for financial advisers interested in outsourced investing. The weekly DISCUS newsletter became Embark News on 31 October 2019.

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