Higher interest rates have led to a dilemma for the financial advice sector: should more cautious clients be persuaded to carry on investing in stocks and shares or should they bank on guaranteed rates in cash? Such decisions have a direct impact on DFMs.
NextWealth data showsUK adviser platform assets grew 9 per cent year-on-year in Q3 2023, trailing MSCI World Index growth of 20 per cent over the same period. The delta is a result of money moving off platform as clients take advantage of higher rates on cash and annuities.
We know from our Financial Advice Business Benchmarks report that an average of 8 per cent of advised client assets are held as cash. Looking ahead, this is the asset class where the largest share of advisers expects to see an increase over the next 12 months.
Market volatility is impacting portfolio returns, with improved savings rates offering an attractive alternative. This is putting some advisers under pressure to deliver a more guaranteed return for clients.
The dilemma is not made easier with financial giants such as Goldman Sachs predicting interest rates could start dropping as early as February 2024. Will this help calm client concerns or will it make them want to rush to lock-in tantalising interest rates quickly, before they disappear?
Some DFMs have stepped in to offer advice professionals a way to keep client money within platform portfolios, where it will be easy to move assets to meet the changing investment landscape.
Tatton and AJ Bell are major-player examples. Other smaller firms are jumping in too, including PortfolioMetrix and P1. Portfolio Metrix recently launched a solution using UK Gilts on a handful of platforms, designed to support advisers with clients looking at favourable bank deposit rates.
The solution invests in short-dated gilts offering tax advantages to those looking to minimise capital gains tax.
Other DFMs do this on a bespoke basis and typically in their own custody so this on-platform solution could be a welcome addition. I say could because the dilemma for advisers and planners is, should they be
reacting to clients’ demands for cash or should they be following the mantra that investing is not about timing the market but more about time in the market?
Another question, raised by many DFMs, is should clients pay a DFM fee on a cash-like MPS on platform? Will those clients that enjoy what could turn out to be a relatively short-term gain be put at a longer-term disadvantage if markets see an upturn and they get left behind?
Leaving on a low and re-entering on a high is a classic mistake that many self- directed investors make.
Is this the time for financial advice professionals to be persuasive about staying in the market or is it time to make cash a significant part of any portfolio? I guess only time will tell.
In the meantime, DFMs will need to weather the storm or think proactively about how they can offer options to the advice sector that keep them in the frame.
