11 May 2021
Selecting the right DFM is a crucial decision for an adviser. In this 3-part series, we reveal what our full and exhaustive rating process involves and what we look for when evaluating and considering a DFM for an RSMR rating.
We’ve been supporting the advisory market with our rated funds service since 2006 and in direct response to adviser demand, we produced our first DFM review in 2017. We now manage a rated list of 17 of the UK’s leading DFMs.
We went one step further in 2020 with the launch of the DFM Academy, a bank of in-depth research and information providing extensive fund profiles and factsheets for all solutions in the Academy, informative and insightful content and videos and topical news and ideas from the participating DFMs.
When evaluating a DFM we start right from the top.
- What is the history of the company, when was it first founded?
- Is the company listed?
- What is the free float?
- Who is the ultimate parent and who are the major shareholders?
Listed companies will have a more rigorous reporting and disclosure regime than a private limited company, making it easier to access key financial information. They may also have better access to capital markets to secure funding. Private firms may have more skin in the game when it comes to ownership, as senior management may well include original founders and practitioners. Lack of outside shareholders may also make it easier for them to take a longer-term view.
- Whether listed or private, who are the people driving the company?
- Board members’ bios; what’s their tenure with the firm, perhaps they’ve come up through the ranks, or come from a competitor?
- Is the firm practicing good corporate governance?
The boardroom sets the tone for the entire business and this is where the culture and values of the firm are shaped, which in turn influence the way the firm interacts with its stakeholders and the wider community.
- Does the company have clear policies regarding ESG and what commitments has it made in this respect?
- How many non-execs are on the board and what is their background and experience?
- What is the overall staff headcount and turnover rate? How has this increased/reduced over the years? Can they recruit and retain quality staff?
Now that we understand more about the ownership and management of the business, we turn our attention to their financial standing.
Again, listed companies will have a little more transparency in this respect. Accounts would be viewed over several years to understand any emerging trends within the business.
- What is the profitability of the business?
- What is the trend in revenue and earnings over the years?
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- Where the DFM is part of a larger entity, what is the size of the revenue segment attributed to the DFM? And is that growing or shrinking?
- What level of autonomy do they have?
- Where is the capex focussed? Are they investing sufficiently in their people, systems, infrastructure, and client servicing functions?
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- How strong is the balance sheet, what is the outstanding debt and when will it mature/need refinancing?
- Pillar 3 disclosures are now readily available for most companies, listed or not. Are they maintaining adequate regulatory capital? Looking at the trend in revenue and earnings is it likely they can continue to do so?
- How is the business growing, organically, via acquisition or both and is it sustainable?
- How do other ratings agencies view the firm? Is the debt rated by credit agencies and if so, what is the current rating for both the firm and outstanding issues and how has that evolved over time?
- Statements from management in the annual reports reveal useful information as to where management want to take the business. What is their strategy for the business? Where are they focussing their attention and resources?
- What risks to the business do management note?
- Are there new product offerings on the horizon?
- Are they developing their own D2C propositions?
- What is the company’s history of compliance? Any past or pending issues with the regulator?
- Are they committed to the adviser relationship? How have they invested in servicing this relationship? Do they have local offices and are they increasing or reducing this local presence?
David Perkins, Investment Consultant at RSMR.
David sits on numerous investment committees and has worked in the financial services industry for 25 years.
If you'd like further information or independent views and ratings on many of the UK’s leading DFMs, head to our DFM Academy using the link below; all the content is purpose-built for financial professionals and is free of charge.