The most important selection criteria for advisers choosing DFMs on platform are fees and charges, according to our research. There is little variation in the DFM fee on platform, so reducing the OCF of the underlying funds has become an important means of reducing the total cost of ownership. As a result more DFMs are offering purely passive portfolios or they are blending active and passive. Our latest report, UK Fund Distribution: tracker funds and ETFs shows that of the major DFMs operating model portfolios on platform, only one does not invest in passives.
Trackers are widely used but fewer than half of these DFMs invest in ETFs on platform.
When we speak to ETF providers with an interest in the UK retail market they often tell us that DFMs are an easier route to market than advisers. But the evidence suggests that there are still barriers to overcome – not least because we know that some DFMs are very comfortable using ETFs off platform, less so on.
Last year saw progress from adviser platforms on two of the major barriers to using ETFs on platform: fractional trading and higher transaction costs. As more platforms diversify and launch their own DFM capabilities, we think that they will look to compete on cost ahead of asset allocation leading them to favour a passive approach. They may also partner with ETF providers to offer ETF portfolios – targeting advisers who want solutions for less wealthy clients. This could be the catalyst to further breaking down the barriers to using ETFs for all DFMs.