Are model portfolio platform deals stopping clients leaving?
Charges for model portfolios offered by discretionary fund managers on platforms have been called into question as the regulator’s deadline for publishing findings from its platform market study creeps closer.
The FCA is expected to publish its interim report on the platform market in the summer and has been investigating competition between providers.
In the market study terms of reference, published in July last year, the FCA highlighted its interest in models being run on platforms.
It recognises that platforms, along with advisers and fund houses, are competing by offering model portfolios, their own discretionary investment services and in-house multi-manager funds.
The regulator says: “These solutions and services have the potential to simplify the investment process by using an automated process to assess investors’ risk tolerance and allocate assets and underlying investments based on their risk profile.”
It adds: “As these investment solutions are likely to form a core part of a firm’s offer to retail investors and financial advisers, we will analyse the extent to which these solutions offer investors value for money.”
Money Marketing has previously reported on how DFMs were struggling to comply with the regulator’s data request. A senior fund management source said the questionnaire was sent to most businesses with discretionary relationships and asked for figures relating to time-weighted investment returns for each client over the past five years, which proved particularly onerous for firms to collect.
Money Marketing now understands that the FCA’s competition concerns around discretionary models held on a platform relate to the opaqueness of charges associated with the models and, if clients are offered pricing deals, the impact this has on clients switching platforms. The regulator is understood to have approached firms for data around offerings.
Defaqto’s adviser tool Engage shows just how prolific DFM models have become on platforms. Two years ago, the tool covered 190 discretionary propositions from 82 DFMs. Of those propositions, 113 solutions were managed portfolio services and 61 of those were available on adviser platforms.
7IM, which also offers its own DFM solution, says it offers more than 25 third-party discretionary managers available onshore and another 15 for offshore use through its platform.
Novia, another platform that has its own DFM, Copia, says it has around 60 DFMs on the platform with each of those offering at least 10 portfolios.
Quilter, previously Old Mutual Wealth, owns DFM Quilter Cheviot as well as the OMW platform. Parmenion also runs its own DFM service.
On the Aviva for Advisers website, 25 DFMs are listed. Standard Life Wrap offers access to nearly 60 DFMs, including Standard Life Wealth, and Elevate offers nearly 30 DFMs.
Royal London-owned Ascentric also offers access to nearly 60 DFMs while Transact has nearly 50 discretionary investment managers available on its platform.
Money Marketing has also previously reported on other pricing deals between platforms and DFMs, for example, Nucleus and Paradigm. Paradigm clients pay a total of 50 basis points, which covers the cost of its discretionary fund management service, Tatton Investment Management. The Nucleus platform charge is 35 basis points.
Counting the cost
Data from Platforum’s most recent research into DFM models on platforms show the median total cost of a DFM model portfolio service on platform is 1.05 per cent.
Results from a Money Marketing survey of more than 400 advisers and paraplanners published in February found the approximate average charge to access DFMs was 0.66 per cent, with the largest proportion of respondents (44.4 per cent) paying between 0.7 and 0.8 per cent. However, these figures did not solely relate to the costs of using a DFM through a platform.
It is understood some DFMs will discount charges for portfolios run through platforms, with some believed to charge around 10 basis points less.
Discus director Gillian Hepburn says: “The DFM, if they are running a model on a platform, will have their own charge, usually plus VAT. There are some DFMs that will discount that charge, depending on the platform. I am aware there are different DFM charges being offered depending on the platform.”
7IM head of platform Verona Smith says the firm’s models are offered at a lower rate on its platform compared with other platforms that use the service.
Smith says: “Pricing of third-party model portfolios is decided by the discretionary manager. In regard to the 7IM model portfolios that we offer on our platform, we do offer these at a 5 basis points discount on the 7IM platform compared with other platforms.”
Steve Buttercase, principal, Verve Investment Planning
One of the appealing things post-Mifid II is the idea that everything can be wrapped up on a platform and provide all the necessary adjustments to a client’s portfolio at a competitive price.
There are new automated versions coming that are halfway between a DFM and a robo proposition where they do an algorithmic reallocation of assets and fund switching.
I have heard they are charging 15 basis points ongoing annually and variations of that with a managed portfolio service. I am keen to see what value they can add to the client as well as to my business.
Novia chief executive Bill Vasilieff says discounts usually come through fund managers offering deals on funds offered within the model portfolio.
He says: “Fund managers generally won’t give discounts to platforms because platforms don’t influence who actually buys the funds. They are interested in giving discounts to advisers or discretionary fund managers where they can influence flows and give them a lot of business.”
He adds: “What we have on our platform are discounted funds when they are held inside discretionary fund managers’ model portfolios. They won’t give them to platforms just to offer to everyone.”
Hepburn says the deals offered on model portfolios are unlikely to be significant enough to encourage advisers to move clients from one platform to another.
She says: “When the adviser is looking at which model to put a client into, there are a whole range of factors to consider; it is not just the actual DFM charges. These charges are quite transparent. It is quite easy to see what the DFM is charging, what the platform charge is and what the adviser charge is, and the DFMs should be able to get a good idea of the cost of the underlying investments.”
Hepburn adds: “There are a whole range of factors that an adviser will use to select a model portfolio on a platform and charges are only one element of that. It is back to the price versus value debate. Do I get the right performance for the charges I am paying, or does my client get the appropriate services?”
Smith and Vasilieff both believe deals on portfolios will not hinder competition in the platform market or the ability for clients to move easily from one platform to another.
Smith says: “Many platforms provide advisers with a way to access a range of third-party discretionary managers. Choice has been widened, alongside the ease of moving a client from one discretionary manager to another on the same platform. This is definitely a positive outcome for both advisers and their clients.”
Vasilieff adds that if platforms are offering better, more competitive prices to customers, that is what the regulator would like to see.
He says: “[Clients] will be less likely to switch around if they are getting a deal. To me, that looks as though it is competition working to the benefit of the customer.”
Andrew Ashwood: DFMs must deliver superior investment performance
Fees and charges are the overwhelming number one factor considered by advisers when choosing a DFM, so it’s only fitting that they are coming under the spotlight. In our latest research on DFM pricing on platform, we found that the median total cost of a model portfolio service on platform is 1.05 per cent.
DFM annual management charges to manage and run models tend to cluster around the 0.36 per cent mark. Many advisers feel that they can create their own risk-targeted models at a lower all-in fee which can deliver comparable returns to their clients. The cost of outsourcing is therefore a big driver for advisers choosing to run in-house advisory models.
On the other side of the fence sit the outsourcers. A lasting argument of why advisers may outsource to a DFM is to allow greater focus on financial planning and leave investment management decisions to the “experts”. These advisers see value in DFM-model portfolios and the extra layer of charges does not act as a deterrent. We have seen an overall increase in outsourcing in the past few years.
Some of the players in this space have launched passive models for those more cost-conscious clients and advisers in the last couple of years. Passive models are available on platform from as little as 0.30 per cent all-in. There has also been a shift in DFMs using a blended passive element within their models to smooth out the overall ongoing charges figure of the underlying funds.
We think that the majority of small to medium-sized advisers have broadly settled on their desired levels of outsourcing. All charges in the value chain – be it adviser, platform or investment management – are under constant scrutiny and it is up to the DFMs to deliver superior investment performance to show that there is added value in the additional cost.
Andrew Ashwood is an analyst at Platforum. Platforum’s next UK fund distribution report – Model Portfolios on Platform – will be published in June