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Will Intelliflo’s model portfolio launch over-reach?

Intelliflo’s new model portfolio service is a bold step forward, but should the back-office provider be reaching so far?

When news broke last year that asset manager Invesco had bought adviser back-office provider Intelliflo in a £200m-plus deal, more than a third of the advice market felt the impact.

Both parties were quick to assure advisers that little would change and that new arrangements would be to their benefit as well as to end-clients’. These included greater investment in “open architecture” technology and plans to expand Intelliflo’s operations overseas.

While Invesco laid out some clear benefits of scale, the asset manager remained tight-lipped on any specific plans to change Intelliflo’s remit, and whether that would include taking the opportunity to give it a wider role in the product distribution chain.

Fast-forward 12 months and the two have announced an integrated model portfolio service that will see Invesco charge £1 per client per month, with the charge capped at £70 a month for advisers.

Invesco head of UK retail distribution Christopher Lyes says the firm’s size makes it able to shoulder the low-cost portfolios it hopes will be “market leading”.
The Atlanta-headquartered asset manager broke into the top 15 global investment managers by asset size last October after acquiring New York rival OppenheimerFunds.

Invesco now manages $1.2trn (£0.93trn), making it the sixth largest retail investment firm in the US.

The UK market is a newer challenge for Invesco, however, and, as it homes in on expanding its British operations, Money Marketing takes a closer look at exactly what its first offering with Intelliflo entails.

A push for products or for transparency?

With strong growth and deep pockets, Invesco’s purchase of Intelliflo was not uncharacteristic of an industry in which asset managers often either buy out or take significant stakes in back-end technology providers.

Tech providers’ acquisitions by investment managers have certainly taken hold in the UK of late, including that by Standard Life of Focus Solutions, and Schroders’ takeover of Benchmark.

Invesco already has a track record of using technology firms it has acquired elsewhere, including US firm Jemstep, to expand its offerings.
The Intelliflo buyout was partly pitched as allowing Invesco to grow internationally with development costs spread over a larger constituency, ultimately keeping costs down for UK customers.

But critics have noted that, given that a third of advisers already use Intelliflo, Invesco should guard against being seen to direct fund flows its way, amid continued talks of conflicts of interest across the asset management industry.

Altus platform consultant Ben Hammond says: “This is an area for advisers to look at in their due diligence and for Invesco to make sure they are very clear about what the new ownership will mean. Standard Life Aberdeen is an example and although it ultimately owns Focus Solutions, it has remained an independent management system.

“A lot of these back-end companies are being bought up by the larger investment houses and, without a doubt, Invesco would see their ownership of Intelliflo as a way to distribute their products.

“It’s now about how they go about making sure advisers are still getting a good and independent service which is necessary for transparency.”

Increased regulatory supervision, volatile economic markets and increasing political turmoil across the UK continue to ensure advisers are kept on their toes. Invesco says the model portfolio service was introduced to break down some of the industry’s complexities and streamline adviser processes, not just to push products.

Alongside Intelliflo, the asset manager identified two challenges that advisers face when operating advised, rather than discretionary, portfolios.
Advisers need positive affirmation from clients for changes in order to rebalance their portfolios. They must also avoid the portfolio fragmentation that comes from low client engagement where they do not take full advantage of advice.

Financial Technology Research Centre director Ian McKenna says that Intelliflo’s refocusing of its businesses will allow advisers to reduce their costs and increase transparency in line with regulatory requirements.

Crunching the numbers

Looking more closely at the breakdown of cost, there are plenty of grey areas on pricing depending on the other services with which advisers engage.
Speaking to Money Marketing, Lyes says the underlying funds chosen will be a key factor in determining costs.

He says: “The end-investor pays as normal and that varies with an adviser charge that in turn is dependent on the platform they use and the advice charge that they pay.

“The cost the investor pays is in the funds they select and pay to create into their portfolio. That is how things stand today, but it can change in the lead-up to the launch. Things could cost anywhere between 35 and 78 basis points depending on risk and naturally more expensive funds will push up the costs.”
Pulling clients’ funds out of the model portfolios will not currently incur an exit cost, Lyes adds.

Costing may not be the most important consideration when placed next to how well Intelliflo will be able to manage its new investment functionality, however.
The Lang Cat director Mark Polson says: “It’s about how this proposition is stitched together. You take the portfolios from Invesco via Intelliflo and you tell clients they need to authorise a rebalance or a trade from their client portal. They visit the portal, tick a box and the instruction goes straight through to FundsNetwork.

“This changes the dynamic and the centre of gravity for portfolio management away from the platform and over to the back office. The platform, in this model, is a custody, dealing and admin service in the background; its ability to add value over and above being quick and accurate is more debatable than at any time I can remember.”

Although there are likely to be a few raised eyebrows, Lyes says Invesco is merely picking up on an opportunity in the market Intelliflo brought to the table.
In addition, polling advisers at Invesco conferences last year found 74 per cent use a model portfolio and 45 per cent of those work with an external provider.
Lyes says: “We could see there was a clear demand and as a global fund house, we had the ability to provide that and go with where Intelliflo had first identified the opportunity. What we have done is clearly innovative and will bring a really new perspective to the market.

“It is Intelliflo’s development and has been very much in its hands.
We won’t be the only firm to be on this system.”
Intelliflo executive chair Nick Eatock told Money Marketing last month that it is in discussions with Seven Investment Management to become one of the portfolios’ first third-party providers.

7IM would not comment on the deal and says it is early days. Money Marketing understands another major asset manager is already in advanced discussions to add its funds to the Intelliflo model portfolios.

Lyes says: “The spread of available funds varies across the portfolios. If it comes down to two options and one of those is an Invesco fund, the fund managers make that decision.

A spokeswoman says there is a limit of 25 per cent of funds per firm across all portfolios. These average at a 16 per cent allocation to Invesco funds, with one holding a 20 per cent Invesco allocation.

Lyes adds: “The technology Intelliflo has built is exciting and we saw the opportunity to bring our investment engine in on top of that and the first part of that is the model portfolio service.”

Adviser views

Mifid II will increase price pressures on investments and, in my opinion, discretionary fund managers will be the ones feeling most of the heat. The £1 for model portfolios will be on top of asset charges and platform fees and adviser charges, which can add up to more than 3.5 per cent in some cases, depending on the adviser. I don’t think adding more costs will be sustainable in the long term as it is the point of Mifid II to shine a bright light on investment industry charges and their transparency.

Chris Petrie, Director, Christopher Charles Financial Service

Kim North greyThe £1 model portfolios from Invesco and Intelliflo will get a lot of people talking. It all comes down to the technology in play and Intelliflo are still so widely used and so popular, with around 35 per cent of market shareA lot of advisers struggle with technology and will easily dismiss certain offerings as too technical, and will stick with back-office providers they know can do the job, even when the systems are old and clunky. This technology is new and in line with some of the smart technology developing in advice markets overseas. Those firms using it will be at an advantage.

Kim North, Director, Technology & Technical

The changing face of the platform market

As with all corners of the financial services industry, the platform market has faced its fair share of consolidation discussion as the sector becomes ever more competitive.

Tussling to compete with increasingly agile technology providers and asset managers with growing distribution arms, there is little doubt the platform market is entering a new phase of life.

Nucleus chief customer officer Barry Neilson says platforms will have to work hard to remain relevant in light of the Intelliflo upgrade.

He says: “Platforms are replatforming everywhere and they need to be robust and seamless. The increased focus on transparency is so important for platforms to show their use and value for money because client experience is a long-term strategy that needs attention.

“Business in this area is really facing a recalibration as firms streamline their focus and branch out in their developments, and investors and advisers are also paying more attention than ever to back-office systems and platforms and on whether each part of the technology they need to use is at its most robust.

“It all comes down to every basis point fee and certain platforms and businesses are able to negotiate down these fees and prices to boost competition. The market is totally polarised between platforms that are doing well and platforms that are doing badly. Some platforms have a very basic output and then some have very low costs, like 10 bps. The point to note, however, is that platforms thrive in complex environments.”

Planning for the future

With the exception of Intelliflo’s Australian venture, talk of expansion overseas is now mostly on the back-burner. Lyes says he “wouldn’t be surprised” were that to change however, but confirmed Invesco is “very focused” on using Intelliflo technology to build solutions for UK advisers.

Increased offerings are also needed to help keep Intelliflo ahead of the curve and retain its strong market share of adviser users. Hot on its heels are the likes of Dynamic Planner, which recently inked a lucrative deal with advice network Tenet, and is evolving from a risk-rating tool into a wider back-office and investment solutions business.

This year alone, Dynamic Planner has launched a Mifid II reporting tool, an income funds research service and set of indices with MSCI. A total 450 investment firms across Tenet’s network will have access to Dynamic Planner in its latest deal.

Hammond says Intelliflo’s strong focus on customer service should help it keep its popularity.

He says: “Intelliflo does a few different things to Dynamic Planner which will risk-rate funds and help advisers a bit more with investment process, whereas Intelliflo’s strength is a decent front end.

“For advisers looking for that, it is a strong feature and their technology architecture is pretty good in being able to plug into external tools as well, which is another plus point for Intelliflo.”

In the discretionary fund management sector, the introduction of Intelliflo’s model portfolio service is likely to up the pressure on providers to broaden their offerings and streamline their costs.

Polson says: “I think these model portfolios will be greeted with unalloyed joy by others, particularly platforms which don’t major on very full suites of functionality and act more as custody-plus type arrangements.”
FTRC’s McKenna says this view mirrors his own.

“Model portfolios that are available for a price as little as £1 a client will have a dramatic impact on the price of both advised and discretionary portfolios and really show that Intelliflo is throwing down a huge challenge to the rest of the adviser software community, including all platforms and the competing asset managers.”

Expert view

It all comes down to client benefit

People talk about vertical integration at the moment, but for the last 20 years, vertical integration across the market has not been new. Throughout the 1990s we saw a lot of providers buying up networks. Through the early 2000s, we saw market investment companies set up platforms and then the evolution this decade has been end to end. Some firms are looking to set up end-to-end platforms and products that are integrated.

What is relatively new, however, is vertical integration from the distributor or the adviser end back into the value chain, rather than in the past, when it tended to be from the manufacturer moving further down the value chain towards the customer.

It’s quite a dynamic market at the moment and this is impacting on how we see the future of the platform. For the end customer, there is a great choice of how they want to choose to engage – they have greater choice in terms of size and shape of adviser firm they want to engage with, which is perhaps the traditional smaller independent firm, or large national businesses.

Disclosures around whether you are restricted or not are quite clear – whether the client understands the relationships in the background,
I think this would probably be harder for them to fathom.

Intelliflo is one of our largest partner firms and the introduction of the model portfolios has been very beneficial. It works as an extension of what we have been doing for a number of years.

Danny Wynn is head of strategy, growth and proposition at Fidelity FundsNetwork



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