View more on these topics

Editor’s note: Model portfolios don’t always do what they say on the tin

Who has benefited most from the host of new regulation to hit advisers in the past few years? I would say discretionary fund managers running model portfolios on behalf of intermediaries would be near the top of that list.

It came from an unexpected direction, but the FCA’s platform market study last month gave those managers a jolt of reality to temper their remarkable asset growth.

Not only did the regulator find that model portfolios held on platform were hard to compare and that fees varied greatly, it also criticised similarly labelled model portfolios for leaving investors vulnerable to very different underlying assets and volatilities in returns.

Whatever happens next, it has certainly added fuel to those who argue that while outsourcing to a model portfolio solution can free up advisers’ time, it has been used by some as a lazy shortcut to avoid going through a full investment due diligence process.

Keeping portfolios on a set of tracks designed to keep the returns profile predictable is laudable, provided the tracks are not pointed in the wrong direction, or warped to start with.

Are model portfolios still on point?

Words like balanced, cautious, growth, income, conservative and aggressive should actually mean something in investment language. We can’t dilute the terms so much that a cautious investor ends up going on the financial equivalent of an adventure holiday. But nor can we get so tied down in the semantics of how risk across a pool of funds is described that we abandon any kind of recognisable linguistic labelling.

You can imagine a knee-jerk reaction to all of this could be to introduce a whole host of further hybrid terms to the investing lexicon to describe the profile of model portfolios. Few advisers would want to have to explain to a client why they are recommending a change to a “cautiously adventurous” or “income balanced” portfolio approach because their provider had introduced another five classifications of risk to fill the gaps.

But while there will always be an element of subjectivity in descriptions of risk, the FCA is right to note that the difference in many cases between advertised and real volatility potential in model portfolios really can be significant in some cases.

Yes, some variation is inevitable, but can we really say the current terms are serving the end client when two portfolios described with the same label are allowed to be as low as two and as high as 10 on a risk scale?

The FCA does not have to give primacy to any one risk rating tool in order to weed out these anomalies. It does not have to say that a particular tool sets the standard and portfolios described in a certain way must only be so because they fall into the risk bracket that tool would prescribe.

But it can come down hard on obvious mislabelling. It can consider placing some kind of limit on cash, equities, property and alternative investment positions, say, in portfolios described under certain risk categories.

Advisers and clients alike might be closer to getting what model portfolios say on the tin when that happens.

Justin Cash is editor of Money Marketing. Follow him on Twitter @Justin_Cash_1


M&G boss exits in leadership reshuffle ahead of Pru demerger

M&G Prudential has revealed a raft of leadership changes ahead of its demerger from Prudential. M&G Prudential was formed in August last year through the merger of asset manager M&G and Prudential’s UK and European life business. Among the changes announced today are that M&G Investments chief executive Anne Richards will leave the company to head […]

SJP drops Aberdeen Standard from £286m fund

St James’s Place has replaced Aberdeen Standard Investments as appointed manager of its £286m Ethical fund. The fund changes, which will take effect later this year, include a manager switch to Impax Asset Management and name change to the Sustainable and Responsible Equity fund. The group says the name change is to “better describe its […]


Aviva and tech provider take joint responsibility for platform errors

Aviva is telling platform users that third party technology provider FNZ is jointly responsible for fixing errors experienced because of its replatforming project in January. Aviva moved assets on its platform from Bravura technology to FNZ six months ago but the project has been beset with issues, including advisers and clients not receiving payments, trades […]

BlackRock takes Nucleus stake in AIM float

Investment giant BlackRock has taken a 3.3 per cent stake in platform Nucleus following the business’ listing on AIM last week. Nucleus floated on Thursday with a market valuation of £140m. According to the platform’s admission document, vertically integrated firm Sanlam still holds a majority stake in Nucleus, maintaining the 52.2 per cent holding it […]

Auto enrolment – so far so good?

Jamie Clark – Business Development Manager The recent report from the Pensions Policy Institute demonstrates the sheer scale of auto-enrolment so far and what we can expect in the future. We’ve pulled out the key information to save you reading the full report. Auto enrolment in numbers Sources: Pensions Policy Institute, The Future Book: Unravelling […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm