As the volume of assets held through platforms has increased dramatically over the past few years, so the number of model portfolios has grown.
Using a discretionary fund manager (DFM) to run model portfolios on a platform is, on the face of it, an ideal solution.
The adviser does not need to research the individual funds, the process is streamlined by removing the need to contact the client every time a switch is made, the portfolios can be automatically rebalanced to a set asset allocation, the adviser feels under control because the assets are held in custody by the platform and the cost of investment management appears to be reduced. In addition, the adviser with a portfolio on a platform managed by a discretionary manager has an excellent context against which to showcase the reporting tools that platforms provide.
Similar benefits to a discretionary platform portfolio can be achieved through investment in a multi-asset fund or a “unitised DFM” offer as described by Defaqto in its Unitised DFM study. So, for an adviser wishing to access discretionary investment management through a platform, which is the better solution – a model portfolio or a multi-asset fund? The differences between the solutions are:
The range of underlying assets
Portfolios managed by DFMs on platforms tend to utilise either Oeic funds or exchange traded funds (ETFs). In theory, it is possible for a DFM to use investment trusts and direct equities in platform portfolios, however, these can create compliance difficulties for the DFM.
It is probable that the DFM seeking to access a specialist asset class may utilise one of a limited number of investment trusts across all investors for whom it is appropriate. The investment may be bought by the DFM into a range of investment solutions including multi-asset Oeic funds, discretionary portfolios run by the DFM and a portfolio on a platform.
The difficulty is that the DFM cannot control the dealing process for the platform portfolio. For most of its clients, the DFM will deal direct through brokers. For investors through the platform, however, the deals have to be routed through the platform, which generally operates more slowly. This creates a significant treating customers fairly (TCF) issue for the DFM – how can a situation be tolerated in which one segment of a DFM’s clients is always dealing behind the rest of the client base? This problem does not exist if investment is made through a multi-asset fund. In addition, the DFM is able to use the full range of assets that can be deployed within a fund including direct investments and hedging where appropriate.
Cost
In model portfolios it is often the case that the cost of the DFM managing the portfolio will be lower than would be the case in a fund or an individual discretionary portfolio. However, with the limited range of underlying assets held in platform portfolios, it also means that many of the lower cost assets cannot be included.
