FCA to review model portfolios in platform probe

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The FCA is set to investigate whether model portfolios and multi-manager funds offer value for money to clients as it publishes its terms for a probe into the platform sector.

The FCA has today outlined the scope of its upcoming study into the retail platform market to verify how firms compete and whether they offer value for money for investors.

While saying model portfolios and in-house multi-manager funds have the “potential to simplify” investments thanks to automation, it will assess whether these services provide value by looking at three main elements.

The regulator says retail investment products held on platforms will be “the primary focus” of its probe into the sector.

It will analyse whether investors have proper product knowledge and if they are guided when making an investment decision, especially where a product is categorised as “complex”.

In its preliminary review, the FCA has looked at 41 platforms, where 14 offer model portfolios only. Six other platforms offer both model portfolios and multi-manager funds.

The FCA will also look at how wealth managers, life companies and some banks use ready-made portfolios.

The FCA says: “We will investigate whether complex, high-risk products are used to construct portfolios with various risk levels and the amount of fund flows into these products.

“We will seek further insights from platforms regarding the underlying consumer groups for these products if there is indeed an increasing flow of funds into them over time.”

Product suitability will also make it into the FCA scope of analysis, looking at whether platforms’ risk profiling tools match investors to a portfolio mirroring clients’ risk level. The FCA will look at how platforms decide on asset allocations on model portfolios and how these are assigned to clients.

The FCA will also explore if chosen products meet investors’ expectations by analysing how platforms communicate with investors.

The study will try to identify “any persistently over and underperforming” portfolios on a gross and net basis, relative to their objectives.

Specifically, in the case of persistent underperformance, the FCA will check whether this is a result of poor client choice or it is driven by performance or cost.

Ready-made portfolios and multi-manager funds are used by a third of retail investors, according to a survey by Platforum.

The regulator will publish an interim report on the platform market in the summer of 2018.



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There are 2 comments at the moment, we would love to hear your opinion too.

  1. Model portfolios are (as I have so often remarked) seem to be for those you don’t have the ability top construct portfolios themselves. In addition a model portfolio may only be suitable for one client – unless of course you have clients who are exactly the same in all respects.

    If you can’t do investments – butt out.

  2. Julian Stevens 20th July 2017 at 1:47 pm

    VFM and the construction of portfolios that properly match each client’s ATR and CFL MAY be issues worthy of regulatory attention. However, whether or not they actually are appears yet to have been established, so this may well be nothing much more than a hunch that something’s not working quite perfectly. Aren’t there several other issues towards which the FCA should be giving vastly greater priority?

    “Regulators should ensure that the allocation of their regulatory efforts and resources is
    targeted where they are likely to be most effective…” I still don’t see that happening.

    As David (now Lord) Owen once said: If you try to prioritise everything, you end up prioritising nothing. And he’s right.

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