Wealth managers will pay much more attention to the areas where they can set themselves apart; doing so entails resolving some of the MPS’ shortcomings.
Model portfolio services (MPS) provided by independent wealth managers continue to receive funding from financial advisors. In 2021, assets in third-party MPS increased by about 25%; this growth rate has been steady for several years.
According to Platforum’s analysis of wealth managers and financial advisors, this phenomenal rise will probably continue in the medium future.
- Assets are moving away from multi-asset funds because advisers (and clients) prefer a portfolio’s line-by-line breakdown to a single-line multi-asset fund.
- Moreover, it appears that some bespoke portfolio management is migrating to MPS, resulting in some portfolio management cost savings (potentially including VAT).
- Furthermore, a great deal of advised business is still present and is being held in bespoke advisory portfolios; this business needs to be systematised immediately. A substantial chunk of this will likely move toward models, as expected.
However, the multiple problems with MPS could ultimately stop its expansion and affect the platforms industry, forcing advisers to reconsider how platforms should function or alter how they are used.
Discretionary Fund Managers
The vast differences in product offerings between platforms don’t influence financial advisors much, but they’re bad news for discretionary fund managers (DFMs).
While some platforms are more accommodating, others have minimal fund selections and sluggish, cumbersome onboarding procedures.
Therefore, DFMs who work across several platforms either run several iterations of their models on various platforms or limit their portfolios to a standard set of widely accessible funds.
Since wealth managers must rely on platforms to rebalance portfolios, each forum may rebalance portfolios slightly differently.
Exchange-traded funds and investment trusts are two more items that many wealth managers want to have in portfolios but which many platforms struggle to support.
Another issue for DFMs is the lack of platforms that can handle unlisted investments and other less liquid assets. Wealth managers are likely to include investments they must leave out of platform MPS portfolios in their private client portfolios.
Drifting portfolios may result from rebalancing MPS on several platforms.
Wealth managers are compelled to use platforms to carry out portfolio rebalancing, which may cause portfolios to rebalance differently on each forum.
This is particularly troublesome with intraday-traded instruments like investment trusts, where platforms trade at various times and don’t pay the same prices.
MPS has drawbacks for parties other than just DFMs. For MPS clients, capital gains tax is a challenge.
Normally, portfolios are rebalanced without considering each investor’s tax obligations.
Numerous companies have obtained discretionary permits and launched their model portfolio solutions due to the influx of assets into MPS.
Clients with unwrapped general investment accounts are primarily the only ones affected by this. Client gains often fall under the annual exempt limit, but it does challenge MPS for clients with more significant portfolios; unitised portfolios might be a better option for important GIA assets.
None of these problems is presently preventing the flow of assets into MPS. It is more effective than advisory portfolios, more affordable than bespoke, and generally more agreeable than a single-fund solution.
As a result of the influx of assets into MPS, numerous companies have been compelled to get discretionary approvals and introduce their model portfolio solutions.
This appears alluring due to growing markets and adviser preferences for MPS.
But you don’t start to see who has been swimming naked until the tide goes out. When the 25% annual growth rate declines, the MPS landscape will appear more distinct.
Sub-scale service providers will begin to merge. Wealth managers will also concentrate much more on areas where they can set themselves apart; this probably entails resolving some of the MPS’ shortcomings.