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Report lays bare model portfolio due diligence concerns

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.”

Adviser view


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.



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There are 11 comments at the moment, we would love to hear your opinion too.

  1. I would suggest that it’s almost equally impossible to compare every single multi-funds platform out there on every single relevant parameter in addition merely to the costs of any given portfolio of funds. It’s also absolutely crazy to have to undertake a similar exercise every year or so. I suspect not many IFA’s actually do. Some use just a very small number of different platforms, some just one, yet still claim to be WoM independent. I just cannot see how they can. And what if Platform B has now become 0.2% p.a. cheaper than Platform A that you recommended a year ago? Do you switch everything or spend an hour documenting why, in your considered opinion, Platform A is still the best place to be?

    Having botched its first two launches, Aviva’s third attempt seems to have been based on a completely unsustainable loss-leader pricing structure that cannot possibly endure long term. So what will IFA’s be obliged to recommend when the pricing structure is revised upwards to more realistic level?

    You just cannot know what any platform is going to be like in practice unless or until you actually place business onto it. And then, if it turns out to be a nightmare, you have to go back to your client, cap in hand, and tell them the only way out is to transfer everything to an alternative which, for a whole range of reasons, could turn out to be just as bad. Is it any wonder that more and more IFA’s are throwing in the towel and going (selectively) restricted?

    Many years I was presented with pitch from a DFM provider but, when I asked for past performance data, the answer was that they couldn’t provide it because all their portfolios were customised for each individual client. Any decision to use that particular DFM provider had therefore to be a blind leap of faith that they would in practice deliver what they were claiming they would ~ which they patently didn’t.

    Things may be much better these days but, as the above article suggests, the issue of costs is still very foggy and I remain deeply suspicious of the whole area of DFM propositions. But that’s just me ~ they may work brilliantly for some folk.

  2. As Julian says “You just cannot know what any platform is going to be like in practice unless or until you actually place business onto it”
    We annually review the Platform market to identify who would best match 3 different client market segments and then match the client to those market segments (or if a wrap isn’t right we will go for a direct product). With members of Group schemes, we originally felt that AEGONs ARC would be a good match until we actually tried it. Once we did we found just how inflexible it is compared to the Independent WRAPs we use for other client segments. Sad really as it was a real possibility to make the group market exciting for the consumer and enhance consuemr experience with access to help from an authorised and qualified financial adviser rather than a “benefit consultant”.

  3. I agree with the above regarding DFM’s, I have never understood IFA’s using these services other than maximising profit for doing very little for the client. What also galls me is the constant tripe that company/platform reps have thrown up these past few years saying that IFA’s should be using model portfolios, multi-manager fund of funds – giving reasons such as the FCA love this approach, quarterly rebalancing, compliance audit trial helps to justify high ongoing advice charges etc…
    Turkeys voting for Christmas methinks.

  4. The uncomfortable truth is this; you can use multi-manager funds or DFM’s to your hearts content and probably everything will be fine. However, if that DFM or MM fund screws up, or worse, they run off with the money, you will be hung out to dry.

    The FCA could require transparency of DFM’s and MM’s but they don’t. They prefer a bit of grey because it makes it easy to scapegoat advisers if they fail in their duty to regulate the DFM/MM.

  5. What the article and some of the comments shows to me, a DFM for our clients’ capital, is that there are many out there who do not understand what managing clients’ capital is all about nor the ‘best’ ways of doing it. Don’t mean to sound patronizing but!

    One day perhaps I’ll talk about ‘how you do it’ but managing a vast, eclectic range of components accumulated over the years in myriad formats, platforms, etc as far as how the underlying assets are being held, let alone trying to do that as an ‘advisory’ service just can’t and won’t work – and is exceedingly costly to all, including the client.

  6. I’m in wholehearted agreement with KJ and well recall an article by Chris Gilchrist. Those that use a DFM are obviously not comfortable with investing for clients. Logically therefore they should butt out.

    Moreover as I have said before I really cannot understand how a client will stand still for being charged twice over. OK the DFM does identifiable work – but the IFA? In effect he/she is just charging for doing nothing but offering sales patter.

    As for Model Portfolios. Who, pray tell, has two clients exactly alike? Even husbands and wives (or particularly husbands and wives!) have different outlooks requiring a different investment approach.
    Model portfolios = lazy investing.

  7. I’ve got to disagree with Harry and KC. I have a mix of bespoke clients, model portfolios and DFM’s. I agree regarding the cost issue but we charge the client less if we use a DFM as we have less to do. Overall the net additional cost to the client is a few bps for a DFM through my firm.

    On the other hand, I am fully aware that my bespoke portfolios and model portfolios present a risk. Whilst I can detail the costs pretty well, I know that if there is a major market movement it will be difficult to protect clients. A great deal of this delay is just down to documenting fund switches compliantly. DFM’s can move much more quickly.

    I’ve used DFMs for a number of years, specifically at the lower risk end of the market where I have found their controls much better than I could achieve. They have given a good outcome to my clients and ultimately I know that if I achieve that then there is less risk to my practice.

    Sadly I think this is a pointless argument. You are damned if you go DFM and if you do your own thing. Only if you can genuinely see into the future are you safe.

  8. @Harry – Sorry I disagree on the model portfolio point while agreeing no one client is the as another. I have model portfolios for quiet a lot of my clients, BUT they can be a different GIA on the same wrap with the model being the core and then satellite funds outside the model.
    I don’t use DFMs for the reason you suggest though Harry, but if I did, then it would be in the same way as Soren, i.e. if someone else is doing part f the work, my fee might have to be reduced accordingly.
    I also use some of 7IM’s models rather than their funds.
    I am not convinced that a DM can move quickly enough (or at the right time) to avoid major market movements, nor that trying to time a market is something we or a DM should be trying to do for clients who are mainly looking at the medium to long term rather than short term movements.

  9. I do not use DFM’s, in the main, due to (a perceived by me) loss of control and opaque charging. I use multi-manager and multi-asset funds for up to certain levels of investment and an inhouse risk graded portfolio service, rebalanced and monitored 3 monthly, which works well. However, I used to fund pick for the client, based on an asset allocation mix, which worked well, but it has been hammered into me that the regulator wants consistency across all advisers within a firm and therefore, we use the ready made mm funds/portfolios. I do wonder whether the ‘penny will drop’ with clients, some time in the future…’Why do I need an adviser and pay this ongoing fee?’.

  10. Ray you are right – if lazy IFA’s continue to punt their client’s into these mm funds/portfolio’s then they deserve all they get if their clients start querying the IFA’s costs and walk away. Direct investing could easily replace/replicate these IFA’s. In my view the investment companies invented these strategies for exactly this result, else why do you think that there has been a rush to introduce the Myfolio’s and their like? What I also find amusing is the increasing number of traditional stockbrokers & DFM’s who now use collectives – where once they sneered at such being the tools of the poor IFA.

  11. It’s fascinating is it not that the Regulator has created a climate in which the most critical element in managing a client’s portfolio is cost, not return. Not even “value for money” because that would be an even more difficult element to objectively analyse and detail in a manner that satisfies the Regulator.
    Whilst there have been many scandals I have never seen any analysis that indicates that the level of “loss” is materially significant in relation to the total amount of money invested, yet the regulations are based around the assumption that every one in the advice market has their hands “in the till”, so are massively simplistic and therefore unattainable in a highly complex and subtle market.
    If Niels Bohr thought that Quantum Mechanics gave one a headache, one wonders what he would make of the current investment market and its regulation.
    To my mind cost is one of the least important aspects of the investment process. Knowing what you are buying is very much more pertinent in a market that is using derivatives in ever more subtle ways. Such are the techniques now being used a client not only needs a dedicated fund professional to understand the product, but also an IFA to ensure that the professional is up to scratch. And that layering of costs starts to make the Regulators neurotic obsession with cost to be merely a get-out for proper regulation. Except even that cannot work with the current charging structures because there are too many allowable loopholes.
    If the FCA want to regulate the market in such a way they need a more simplistic model. e.g. retail investors can only buy UTs/UCITs 1 and they will have the following maximum costings etc. DFMs can charge the following maximum amount. I know that will never happen because it would reduce the manpower needed at The Monastery of Silly Thoughts.

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