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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.”



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There are 13 comments at the moment, we would love to hear your opinion too.

  1. At last. Model T Ford investing being clamped down. (Any portfolio you like peovided it is one of the 3 – or four – that we offer).

    The shoehorn can be put back in the cupboard and perhaps we might now get bespoke portfolios for each customer. If people are unique, so should their invetments be.

  2. Harry – right as usual! I thought this was basic investment stuff. Get the asset mix that satisfies the client attitude to risk, then select funds (active or passive) which add up correctly to that asset mix. Any back office system should be able to handle this. Create 30 portfolios if you want, for coat, accrual, income, risk, pensions, medium term investment etc. Or you can produce a bespoke portfolio if the client’s needs dictate. Then just review them at reasonable timescales. Get a good back office system rather than relying on others to do the work for you!

  3. Although clients are of course individual, their needs enjoy a significant commonality. An investor wants to take a view on risk and have it met by an appropriate solution consequential of researched advice. So why should Mr Brown invest his £50k differently to Mr Smith? Consistency of approach is very important as is creating planning solutions. Planning solutions are not investment solutions. From personal experience, if you sit with an investor and show them a myriad of investment solutions and the client makes an informed choice that falls outside of modern asset allocation expectations (especially those of the FOS) then get your cheque book ready for settling the complaint. Off piste investment solutions are not the answer. Personalised financial planning is.

  4. Agree with the points from Harry and Ken – if every client is unique and there are so many softer facts to consider, how can you simply plug them into a limited set of predetermined solutions?

    For example, you could have 3 individuals who are for sake of argument ‘medium risk’ – one is 30 and saving each month for retirement, one is 60 and entering drawdown (and needing income) one is 80 and lives off guaranteed income and is investing for other reasons.

    All would have completely different portfolios as their aims and objectives are totally different …. the only thing that’s similar is the answers they gave to a formulaic set of questions.

  5. Forgot to add…. surely the best measure of performance is the change in value of the clients investment net of all costs????

    Passive vs active vs DFM vs IFA …. bottom line is the risk adjusted return in £s.

  6. I use them a lot – The ones that are mapped to DT as it is my preferred risk profile tool. as long as the portfolios are regularly rebalanced to maintain the initial risk profile I am happy and so far so are my clients. Provided of course the TER is not above 1.1%pa it works for me. For me these type work as they do what they say they should. Unlike a lot of people on here (who are obviously much more intelligent than me and only ever choose high performing funds all the time) I do not profess to be some kind of expert fund chooser or stock picker. What I do profess to do well is to be able to allow my investment clients to get better than deposit rates over a 5 year timescale (cumulative basis). That is all they are looking for and if it is not I don’t take them on. I like to leave all the clever advisers to do the “shoot your lights out stuff”. A good Model portfolio is very hard to beat and it allows me not to have to think too hard, nor do I need to charge OAC as the provider does all the ongoing stuff. Give me Vanilla any day

  7. I’d be very happy to have a visit from the FCA to check our model portfolios. We review them every six months and resist the urge to fix something that isn’t broken so our default position is to leave a fund in unless there’s a compelling reason to change it. We use a mixture of active and passive funds and simply change the allocation percentages to each to suit the client’s ATR/CFL. It’s simple, it works and so far has knocked spots of any DFM portfolio I’ve seen and at considerably less cost!

  8. There is a comment on this forum which I think illustrates what is wrong with model portfolios:
    “…it allows me not to have to think too hard”

    My response to this would be the rather less than polite (for which apologies) “Then go and flip burgers at MacDonald’s”

    This is a very cerebral, complicated and technical industry and it requires assiduous application if any attempt is to be made to satisfy clients.

    I also note that the usual ‘precious’ references to ‘planning’. I have been a CFP ™ for not far off 20 years. I have never been so ‘twee’ as to harp on about planning. All advisers plan – it’s the nature of the job. What we are supposed to do is to make the client money, or to protect what he has, within the parameters and preferences of that individual. The key word here is ‘individual’ and that doesn’t gel with model portfolios.

  9. I would be interested to see how some of the actual historical performance of these Model Portfolio’s compares to Lifestrategy. The backtested data always looks great, however it is not the actual performance due to survivorship bias.

    This is especially true of a Model Portfolio’s primarily made up of active funds. You never see the sold dog funds in the performance history. Its also likely they will buy recent out-performers that are unlikely to repeat out-performance in the near-term. It’s not inconceivable that the actual performance is 2bps/3bps plus lower than the backtested data.

    I think a “buy and hold” investor is likely do do a better job than most of these investment committee’s/consultants/advisers or whatever it is they like to call themselves. #jobsfortheboys (not enough girls) #toomanymiddlemen (not enough women)

  10. All my clients portfolios end up bespoke, BUT they will start with a structure called a model.
    It’s a bit like what the Army used to teach with “O Groups”,you could have your full orders based on a structured plan with a model built and the whole process gone through for the whole platoons benefit so everyone knew what was supposed to happen and when, however real life was rarely like that, you invariably didn’t have time for a full O group and models were very sketchy and had to be adapted as the plan was being explained. Ultimately if often ends up “Quick Battle Orders” done on the hoof and a lot of the models end up adjusted to client individual quirks and reactions to recent events.
    If however you don’t have a model (don’t do QBOs) you end up with mission creep,people going in to danger areas and loss (of life and limbs).
    Give me a model portfolio as a starting point, but don’t be overly rigid. We’re having our quarterly review of core and satellite funds on Friday, my locum does most of the fund research with his administrator, we then end up with a panel, but as my client base is VERY different from his, my clients actual portfolios are massively different to his clients, but we have systems and controls for research and can justify our decisions for fund selection to the FCA, but more importantly to our clients!
    Like Abraham, we think passives are very important in a portfolio and reduce the overall TER when used sensibly as many active fund managers add little or no value at all and if you look under the bonnet are just closet trackers priced at active management charge levels!
    Smaller companies, AIM and specialist funds are where a fund manager may be worth the extra , but NOT the efficient parts of the market.

  11. There is another potential problem with Model Portfolios that I do not see many people talk about, and which I hope the FCA will look at – the (lack of) tax planning. A classic example would be someone investing £100,000, with £15,240 in an ISA and the rest outside an ISA. Let’s say they get recommended a multi asset model portfolio where the Fixed Interest weighting is 30%/£30,000. What does the client often get? The multi asset model portfolio in the ISA and the same multi asset model portfolio outside the tax wrapper i.e. their ISA is only populated with 30%/£4,572 of Fixed Interest. What should probably happen is that the £15,240 ISA is fully populated with Fixed Interest, with the rest of the portfolio outside the ISA.

  12. Bespoke portfolios for me all the way !

    Manager of Manager/fund of funds/model portfolios which ever way providers like to dress them …. short skirt high heels, grey suit with shinny shoes, nice comfortable cardigan pipe and slippers etc etc etc

    Most if not all I have come across are nothing more than closet trackers and …. well ? a bit one size fits all.

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