Advisers braced for FCA scrutiny on model portfolios

Advisers should prepare to deal with increasing regulatory scrutiny as the FCA prepares to tackle lack of transparency in model portfolios, experts warn.


In its asset management interim study, published in November, the FCA says model portfolios could increase efficiency and give investors a suitable investment service. However, it also stresses three risk areas: comparability, choice of asset managers and value for money.

Consultancy firm NMG found that 50 per cent of 2,500 direct retail investors surveyed online chose a ready-made portfolio, the FCA says.

NMG also estimates that as recently as July about 31 per cent of investments below £50,000 were held in model portfolios.

Thameside Financial Planning director Tom Kean says scrutiny of model portfolios’ value for money is one of the “unintended consequences” of the regulatory environment advisers find themselves having to deal with.

He says: “If you make the regulated community so keen to find ways of saving money and time with streamlined processes, this is the inevitable consequence.

“My own view is ultimately it’s up to the adviser and client to discuss this like grown-ups, and whichever way you look at it, there can be economies of scale, cost and efficiency that are likely to benefit the client. Equally, as has always been the case, there are those who will look to exploit this to the detriment of the investing public.”

According to a survey from FE, conducted at the start of this year, of 188 advisers, almost 50 said they planned on placing 50 per cent of clients’ assets in model portfolios.

The FCA says some advisers and investors find it difficult to compare and analyse performance of different types of model portfolio as they continue to grow in number. Similarly, fund managers could lose a large amount of market exposure, since model portfolios include only a limited range of funds.

Chelsea Financial Services managing director Darius McDermott says: “There are too many funds that choose the climate in which we are, for example, such as those designed for pension freedoms. The majority of fund managers we meet are not all good, but they try to add value.”

Finalytiq founder Abraham Okusanya says the regulator is about to “open a can of worms” with its analysis of model portfolios, especially when comparing them to “a simple” low-cost tracker-based portfolio.

He says: “It’s incredibly hard, if not impossible, to compare model portfolios on platforms either provided by the platforms or discretionary fund manager or other third-party fund research firms. The vast majority of firms don’t publish data.

“Model portfolio providers should publish their performance, volatility and pricing data on a monthly or quarterly basis. This is the only way to level the playing field.”

Okusanya says the FCA should look into whether model portfolios are measured against “appropriate benchmarks”, given the risks involved, to avoid investors being misled about performance and value.

The FCA says both advice and model portfolio fees, underlying fund fees and, in some cases, platform fees, are having an impact on investors’ returns when they choose model portfolios.

Okusanya says the typical ongoing charge figure of model portfolios is about 0.75 per cent plus an additional 0.30 plus VAT for discretionary management.

Gbi2 managing director Graham Bentley says: “The question is: do model portfolios in their current form actually provide the customer with any additional value?

“I know some people have not really understood what that section [of the FCA study] is about. It is about whether the platform process gets in the way of delivering the investment value and whether the adviser’s involvement does.”