It is impossible for advisers to do whole-of-market analysis of models portfolios due to opaque and inconsistent data, a Lang Cat and CWC Research report argues.
With the investment industry’s lack of uniform price measures, limited portfolio disclosures and share class “proliferation”, it is too difficult to determine relative merits of model portfolios, multi-asset and DFM services, Lang Cat principal Mark Polson says.
“The sum total of these points is a due diligence headache,” he says.
“We conclude that at present, there is no way for an intermediary to achieve an effective whole of market, time-efficient, quantitative analysis on model portfolios.”
The findings are in the Never Mind the Quality Feel the Width report into centralised investment propositions published by the Lang Cat and CWC this week.
CWC boss Clive Waller says advisers risk regulatory sanctions due to issues with product comparison and suitability assessment.
More than half of advisers say they look for the cheapest funds while compiling portfolios, but finding the total cost for multi-managed funds is “significantly more straightforward” than for DFM products.
“The lack of transparency around DFM pricing, as well as trust in what is disclosed, were major issues,” Waller says.
“Nearly half of those who recommend DFMs say it is quite hard or very hard to identify total costs.
“The regulator is clear that, whether or not a discretionary manager discloses charges in full, it is the duty of the adviser to identify what the costs are.
“If this cannot be done, that provider cannot be recommended. The onus is firmly on the adviser here with no scope for interpretation or leeway.”
CWC interviewed 45 firms, including 39 advisory businesses, four asset managers and two paraplanners. Some of those routinely use model portfolios, outsourced DFMs, multi-manager funds and other standardised approaches to advice.
Of those interviewed, 70 per cent used in-house model portfolios, with 70 per cent using an internal investment committee when deciding on allocations.
The portfolios are rebalanced at least once a year, with virtually all the portfolio movements happening on platform. However, “very few” firms had discretionary permissions.
“The majority of our respondents believed that outsourcing investment management increases regulatory risk, partly through extra parties being involved and a loss of control,” CWC says.
Schroders was the most popular choice for multi-manager funds, followed by Vanguard and 7IM.
Meanwhile, the Lang Cat delved into the prices, construction, performance and volatility of the most popular multi-asset products and DFM services.
The consultancy says the industry is “stifled” by opaque and inconsistent data.
Polson says most centralised investment propositions are built on what is best for the firm, rather than on the suitability of the client, and that outsourcing CIPs “feels sticky – and not in a good way”.
“Advisers have been very much left to their own devices and, as a result, are flailing about for want of a logical path to follow,” he says.
“Add to this a lack of transparency and inconsistent reporting of what data is available and we’re left wondering how advisers are even doing as well as they are.”
Paul Greaves, partner, Hart Greaves
We create our own model portfolios and only use DFMs for clients with large holdings of individual stocks or complicated instruments.
DFM data is more difficult to track down, but we them in limited cases because we don’t have discretionary permissions.
For non-DFM services the answer is software. There is a tonne of data out there. Having access to some decent software and being reasonably disciplined in criteria that you use to narrow things down.