Advice firms have defended themselves against accusations of product bias as a lack of transparency across in-house fund ranges emerges.
Significant recent inflows into advice firms’ model portfolios and centralised investment propositions have prompted the FCA to keep a watchful eye over suitability requirements. At the same time, experts are questioning the value of firms’ model portfolios against multi-asset funds or other similar investments, urging investors not to be blinded by the premise of “low cost”.
Money Marketing asks if the regulator is right to scrutinise advice firms at the same time as it is zeroing in on platforms and asset managers through in-depth market studies. We delve into firms’ CIPs to determine how they differ and ask experts if fund management is simply becoming a revenue stream for unprofitable networks.
In the asset management market study, released in June, the FCA said adviser networks might have a commercial interest in promoting their own funds because the network generates revenue from investors that choose the in-house fund or portfolios.
A recent survey from Equifax Touchstone suggests nearly four in five advisers are now placing clients’ funds in a CIP.
Recently, networks have publicised the success of their in-house ranges, citing growing funds under management and increased flows.
Openwork runs the Omnis fund range, which is only available to Openwork advisers and is currently managed by companies including Baillie Gifford, Jupiter and Woodford Investment Management.
The range includes 10 single strategy funds and the network also has a model portfolio range and an Omnis discretionary management service. As of August, Omnis model portfolios had reached £5bn in funds under management.
Meanwhile, rival True Potential last month reported its discretionary portfolios attracted £2bn in the past year, with inflows up 200 per cent.
The firm announced the 10-strong suite of funds are seeing daily inflows of £10m, with the range now holding £3bn in assets under management.
Openwork marketing director Philip Martin says there is “a whole infrastructure” at the firm that monitors investment decisions and the choice of fund managers of the in-house funds.
He says: “We are governed by a whole host of legislation and regulation about how we do fund management. The company has its own investment committee, which is a subset of the board and it has a documented process about how it looks at the whole market, narrows it down and invites people to manage the money. We run the fund company in the same way Schroders, Fidelity or BlackRock do. We would argue we managed to price these funds in a way that gives significant advantage to the client.”
A balanced investor in an Omnis fund will pay a total charge of 68 basis points, which Martin claims is between 5 to 10bps cheaper than the wider marketplace.
Martin says the discretionary business at Openwork is an overlay to the rest of the offering, and is not a “default option”.
The DFM, which launched in April, has £250m, part of which leverages the Omnis range.
Martin says: “If you think about the customer and value you have no issues at all. The deeper problem is going to be some of the other propositions that are perhaps not doing that and the proposition is considered more expensive.”
Another IFA firm, Gibbs Denley Financial Services, has an in-house fund range and is about to launch a discretionary portfolio for external advisers. The in-house funds, managed by Gibbs Denley Investment Management, have amassed £420m over eight years.
Gibbs Denley director David Ellis says: “We have an internal and external investment committee and the quality of that committee is crucial.
“We have a cautious view of the market. Most clients are looking for a reasonable rate of return but what they really want is control of the risk.”
Ellis defends the rigour of the firm’s investment processes, saying it resists some of the “more vertically integrated” fund firms, such as Standard Life, and the ways it wins business from advisers. He says many asset manager-owned platforms can “subtly” influence advisers on using a larger number of their funds in exchange for a proportionally higher platform discount.
This is one of the issues the FCA is consulting on in its upcoming platform market study.
To guarantee an independent fund selection to clients, Gibbs Denley’s investment committee always opts for platforms with the widest fund choice, says Ellis.
“If the platform has criteria that you must use a certain percentage of their funds [into our portfolios] then we would immediately cease any conversation.
“That conflict of interest sits with those people that are more vertically integrated than we are and our fund managers, discretionary managers and providers clearly have got conflicts of interest which we don’t think we have because we come from an IFA background.”
Finalytiq director Abraham Okusanya claims in-house funds reintroduce direct bias into the advice process, which goes against the principles of the RDR.
He says: “Advisers within these firms become inherently conflicted – the default is to recommend their own products even where there are better and cheaper products by a competitor. The customer may not end up in an unsuitable product, but often these products are mediocre.”
Money Marketing understands as part of its platform study the FCA is primarily looking at the model portfolios platforms offer, rather than the CIP constructed by advisers.
Morningstar data collated for Money Marketing on a number of networks’ ranges shows that, for most funds, there is a lack of a comparable benchmark. Morningstar’s performance data, which ranges from yearly 5-28 per cent returns as of August, only refers to the individual funds.
Most of the funds analysed are less than £100m in size. Of 47 funds between the Openwork and True Potential model portfolios, 60 per cent are less than £100m in size and 34 per cent less than £50m.
Zero Support managing partner Phil Young says most networks’ in-house funds have performed relatively well because of market conditions over the past five years.
However, the high platform costs of some firms such as True Potential, are, in reality, a drag on the funds’ performance.
He says: “True Potential has multiple channels where people get margins from so, in a way, you can have a good investment solution that’s relatively cheap that would have worked well in the market conditions over the past five years or so.
But True Potential charges 4 per cent for their service but if you agree to use their platform they reduce the cost of their percentage and they justify that by saying it is a more efficient way to do it. But that is just a different way of paying commission.”
True Potential was unavailable for comment.
Lee Roberston, chief executive, Investment Quorum
There are two sides of this story: one is adviser groups looking to get more control over what’s going on within their business and investments, the other side is you can’t compare CIPs. The regulator is looking at a lot of issues at the moment and in all of that there is an overlap and Cips are in the middle. This is not to say all CIPs are bad, some are good but it is about having more transparency.
Young says the old commission system has now transformed and does not just come in as a fee reduction but also in equity stakes into investment firms, or buyouts.
Tatton has amassed almost £4bn in assets under management in the four years since the service launched.
It is understood that while the DFM of Tatton quotes 15bps as a charge it also invests money into its own multi-manager funds instead of single underlying funds creating additional – and undisclosed – fees to customers.
Young says: “This is completely pointless and it’s not as straightforward as ‘it’s cheap, it’s low cost’, because it is money going back into the business in another direction.
“This makes the service far more expensive than it looks because more than 50 per cent of the money goes into the multi-manager.”
Tatton charges their service 15bps. Portfolio costs range from 0.3 per cent to 0.8 per cent including overlay strategy.
Gbi2 managing director Graham Bentley says although they might be cheaper, in-house funds lack transparency in a number of ways.
He says: “In the old days we used to call these ‘distributor-influenced funds’ which were overpriced clones of existing funds. True Potential and Omnis funds cannot be compared easily with their peers because all the funds are listed in the Unclassified Sector.
“Very few of the funds have benchmarks, consequently the customer cannot tell how well they or the managers are doing because the fact sheets just show returns without anything to compare it against.”
Bentley says True Potential portfolio names are “confusing”, for example, its £115m Cautious 2 and £21m Defensive 7 funds have the same volatility.
He says: “CIPs are just ways of providing ready-made solutions to a cut-and-paste risk-profiling exercise. The rise in advisers running their own model portfolios is a reflection of the same issue. Advisers want to control the customer’s capital to extract fees.
“Those organisations that are big enough can unitise those models. I expect to see more models from DFMs becoming unitised, to jump on the same bandwagon.”