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Model agents

Cherry Reynard reports on the trend towards model portfolio services as advisers look to outsource their investment management

In the last few weeks, a number of discretionary fund managers have launched model portfolio services on the major platforms, aiming to meet the growing demand from IFAs to outsource investment management.

Model portfolios have been available on platforms for some time, with Quilter having led the way, but the number of recent launches suggests they are gaining traction as an outsourced solution but what do model portfolios offer that other outsourcing options do not?

As advisers need to shift away from commission-led sales, the regulatory burden of fund selection means that outsourcing to specialists such as discretionary fund managers, multi-managers or similar should make business sense.

They have had three main choices – multi-manager, managed portfolios and discretionary fund management, although, in practice, the lines are often blurred between the different approaches.

Managed portfolio services fill both the need for the advisers to outsource and, it might be argued, the need for discretionary managers to carve out a role after the RDR..

The past few weeks have seen Berry Asset Management launch its service on the Novia platform, Bestinvest on the Ascentric platform and wealth management group Equilibrium Asset Management on the Nucleus platform.

Nucleus managing director David Ferguson says the platform has more funds of this type coming online over the next few weeks.

Managed portfolio ranges will tend to have between five and 10 risk-managed portfolios invested in collectives. Many have been brought to market by discretionary managers looking for a way to tap into the mass-market end of an IFA’s client bank.

They differ from a traditional discretionary service in that investors will be assigned an existing asset allocation and fund selection rather than having a bespoke portfolio designed for them. However, in practice, many discretionary managers use model asset allocations for most clients.

Equally, a number of the managed portfolio services offer some element of bespoking – the Equilibrium service, for example, works in partnership with IFA firms to adapt the model to individual needs.

Ferguson says the advantage for advisers is they get access to discretionary fund managers at lower cost and with lower minimum investment levels. The advantage for the discretionary fund managers is they get greater volume potential and can exploit their intellectual property.

Russell Investments head of IFA sales Danny Callaghan believes this type of portfolio will have more resonance after the RDR. He says: “In the cost spectrum, DFM is more expensive. The value chain has to be unbundled after the RDR and investors will need to understand each element.”

With a managed portfolio service, IFAs only offload some of their regulatory responsibility.

Whitechurch offers both discretionary and managed portfolio services and investment director Gavin Haynes says: “Where responsibility lies will differ with different models but, in our model, it is down to the IFA to assess suitability. They own the client relationship and need to match their investment to their expectations.

“They will come to us and say we need a portfolio providing income and growth and we run the portfolio with those risk parameters. We take responsibility for the fund selection and ensuring asset allocation is kept within the boundaries set.”

In other words, the adviser has responsibility for ensuring the asset allocation is appropriate for the client and they have selected the right outsourcing partner. The model portfolio provider has responsibility for ensuring they are not invested in, for example, racy emerging markets for an income remit.

Ferguson believes this message has not always been well understood. He says: “IFAs still have oversight responsibility. They have got to be very careful with any outsourced investment relationship. They need to monitor performance and check that the mandate is adhered to. There has been a lot of supply push on this type of offering and some discretionary fund managers have been implying that IFAs do not have to worry if they outsource to them. That could be a serious problem.”

The companies offering managed portfolio services will differentiate themselves on cost, investment skill and the extent to which they hand-hold advisers.

Bestinvest senior adviser Adrian Lowcock says: “Our managed portfolios aim to capitalise on our research function. It has been one of our key strengths. Graham Frost, our CIO, is supported by 10 analysts. They devise the asset allocation model at the top end and then it is about picking the right fund managers and investments. It is all about risk-adjusted returns – managing risk and keeping within certain investment parameters.”

The providers also vary in the amount of hand-holding for advisers and their clients. Some, such as Russell Investments provide their own risk questionnaires to support the outsourcing process. Callaghan believes there are structural weaknesses in some managed portfolio systems.

He says some risk questionnaires are not necessarily as robust as they should be. There is also a problem with IFAs adapting some asset allocation models, leading to wide differences in equity weightings and he says these can be anything from 15-20 per cent to 60-70 per cent for a “balanced” investor.

Callaghan says: “Some asset allocation models will just say ’30 per cent in equities’ without specifying whether this is in large cap, small cap, international or domestic. Also, some will only model the main asset classes. We incorporate areas such as commodities, infrastructure and believe it is essential to consider all these in any model.”

If they are done well, model portfolios are an effective means for clients to gain access to skilled discretionary managers at lower cost with lower minimum investment levels. They also remove some, but not all, of the regulatory burden on investment. However, they are not a panacea and – as with all funds – there are good and bad. Advisers need to do their own due diligence.


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