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Advisers warned over platforms’ use of model portfolios

Advisers should not be “dictated” by platforms on how model portfolios are constructed as big differences emerge between the models used by providers and risk-profiling firms.


Advisers should not be “dictated” by platforms on how model portfolios are constructed as big differences emerge between the models used by providers and risk-profiling firms.

Speaking at Money Marketing Interactive earlier this month, Gbi2 managing director Graham Bentley pointed out the “remarkably different” asset allocations offered by providers such as Old Mutual Wealth and those offered by Dynamic Planner, the risk-profiling tool provider.

In one example, he noted that for the same risk rating, level five, the most common used by advisers, Old Mutual Wealth’s asset allocation offers no exposure to bonds across the entire range, while Dynamic Planner allocates around 30 per cent to the asset class.

Instead, cash occupies a large portion of the allocation for Old Mutual Wealth at 45 per cent.

Dynamic Planner subdivides bonds into corporate and high yield categories, while Old Mutual Wealth only has one overarching fixed interest category.

While he did not question the low weighting on bonds from Old Mutual Wealth given the uncertain market environment, Bentley said Old Mutual’s investment arm Old Mutual Global Investors might be “disturbed” by the large uninvested cash holdings Old Mutual Wealth holds while charging clients the fees it does.

Bentley added: “Very often this happens to be the modus operandi of your platform that you are associated with. So whatever your broader view of what markets are doing make sure that you are not dictated to by the ‘administration platform’ that you are on”.

The FCA is looking into the role advisers play in the investment chain as well as to what extent model portfolios offer comparability, choice of asset managers and value for money.

Wychwood Financial Services director Rob Wood argues asset allocation models should not be making active investment calls as this is down to clients and their advisers.

He adds cash should be placed in deposits or savings and not in portfolios.

Wood says: “I believe Old Mutual Wealth is making an active call to avoid bonds, but that completely ignores the basic principle of holding them”.

Investment Quorum chief executive Lee Robertson says there can be big differences in model portfolios’ allocations but that puts “an absolute responsibility” on the adviser to make a final decision on behalf of clients.

He says: “If advisers know that bonds are pretty toxic, as we think they are, they won’t use them but it all comes down to what advisers want to do.”

Old Mutual Wealth investment marketing manager Nathan John says: “In 2016 the Old Mutual Wealth investment committee took the view, with the input from Willis Towers Watson, that fixed interest was especially expensive on a risk/return basis over a five-year outlook.

“Our risk-matched optimised asset allocations reflect a wide range of factors including tax optimisation, impact of currency movements, and the relative yield, correlations, and risk/return profiles of each asset class.

“We do not consider the asset classes in isolation, but the risk of the portfolio as a whole. These wide ranging inputs allow us to produce an asset allocation that has a strong expected return for a client’s level of risk.”



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There are 12 comments at the moment, we would love to hear your opinion too.

  1. Nick Pilkington 31st May 2017 at 9:20 am

    It just goes to show that risk profiling is a very subjective science. Government bonds are traditional considered low risk but a long term bond in a rising interest rate environment is likely to lead to substantial falls. An investment in UK smaller funds would be high risk but you could argue that a percentage placed in this would still be sensible.
    The real concern should not be tinkering with what constitutes the correct risk in a reasonably well considered model portfolio but avoiding investments placed in totally inappropriate funds such as pensions invested in Brazilian holiday resorts etc

  2. Duncan Gafney 31st May 2017 at 9:24 am

    This is where the adviser/s should be researching their models properly and taking a “view”. My company is of the same view currently as Old Mut and some of the portfolios we use currently have significant cash holdings in them.

    Why anyone might think that cash is not a viable asset to be held in a portfolio is beyond me. Would anyone question that a tactical move into cash mid 2007 would have been a good idea? The same argument could easily be levelled at Gilts currently. Why would a client may ongoing fee’s for an asset likely to return 1-2%pa over the next 5 years? Cash will always tend to be a short term hold, Gilts will not…

  3. Yet again this points to those who should not be giving investment advice as they are evidently not up to the task of constructing robust portfolios themselves – or that they are just too idle to do so.
    Model portfolios and the use of DFMs are the hiving off responsibility. What is even worse is abrogating the task to a DFM who then uses model portfolios. This is the Top Shop approach when advisers should be aiming for Savile Row.

    • Actually, it’s Top Shop product for Saville Row money which makes it worse. Each extra layer is a cost to the client both in pure money terms and loss of investment opportunity.

      Client goes to adviser, adviser selects platform and DFM, DFM selects investment fund manager, investment fund manager selects investment (or another investment manager if it’s not a direct investment). Each layer costs. Where is the value?

  4. Strange the headline is that ‘advisers warned over platforms’ use of model portfolios’. The concern seems to be rather about advisers use of model portfolios….

    • Good point Hugo!

      • @Harry Katz & Grey Area
        Are you saying that ALL advisers should allocate the asset diversification and choose the individual fund managers for their Clients?
        I, for one, concentrate on the retirement, tax and cashflow planning for my Clients and leave the asset diversification and selection to the ‘experts’ who have the skill, time and money to perform the regular research, monitoring and selection for their Tactical Active or their Strategic Passive portfolios.

        • @ GA

          As ever a pithy comment. You are so right.

        • Dare I point out that concentrating on ‘retirement’ means making money for the client. At root a pension is an investment with a few knobs on. If you don’t make money you don’t have a cash flow, nor does tax have to worry you unduly.

          It all STARTS with investment, your bits come as a corollary.

          And of course not forgetting Grey Area’s comment on the escalation of cost.

        • @Ted Shaw
          The answer to the initial question is that in most cases the answer is ‘yes’. Perhaps with UHNW it needs a more complex approach and also opens up the possibility of direct investment without the wrappers.

          Where the investment itself is concerned, are you selecting an expert (DFM) to select an expert (fund manager) who, in some cases, selects an expert (another fund manager)? How is that good value for YOUR client? Presumably you have already risk rated the client so it’s not a big step to match that to an asset allocation and use passives, or simply select some decent matching funds/managers and letting them get on with it. How much better off would the client be by saving from the multiple layers you are pushing them through? How much better off would you be by charging the client a little extra for a holistic service?

          In short, for each client, lay out ALL the costs of all the layers and ask yourself where the real value actually lies (which Harry alluded to). Could you make the value proposition better for your client? If not, then there’s no issue.

        • @ Ted Shaw

          I’m a little surprised you asked “And the answer to my initial question?”

          I had presumed the answer was implicit in my post. As GA has responded, the answer is ‘Yes’.

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