I’ve written before here about what Mifid II does to the administrative load for those who run advisory models. Most firms haven’t really felt this yet, but suffice to say that the regulation wants to make very sure you’re not doing anything you don’t have your client’s permission for. This is one of those areas where the regulation is really aimed at wealth managers doing more frisky stuff, but ‘normal’ advisers get caught.
Now admin is just admin – it’s not a reason not to keep offering the centralised proposition you’re proud of. But it puts an interesting new dynamic on the table. By my reckoning, companies adopting this route are doubling the amount of admin per client compared with running discretionary models (insourced or outsourced) or using packaged multi-asset products.
I think it will shortly prove completely untenable for firms to run these portfolios without appointing at least one or two individuals to evidence the research, collect the client permissions and record everything properly. Larger businesses with more resources will be fine with this, probably – but smaller companies will see yet another drain on their profit and loss statement.
I have found no evidence in all my years working with advisers that those who provide their own portfolios are able to charge a premium over firms that offer third-party investment solutions. To put that another way, the pie is the pie. You can’t just make it bigger; to do so risks visiting the dragon-infested land of 2.5 per cent and that’s a dangerous place unless you are armed with the ‘sword of outperformance’ and the ‘shield of informed consent’.
So I think two things are going to happen this year. First, more and more companies will outsource more of their investment portfolios. That will make some DFMs happy, but the real beneficiary will probably be multi-asset providers, as long as they can get through the single-line-of-stock issue that too many advisers still see as a sticking point with clients.
Second, more companies will split their activities into an investment management firm and a financial planning concern. Some may go so far as to have a regulated and an unregulated arm – the practice of financial planning is unregulated; it’s financial intermediation and investment management that’s regulated. That will allow proper process, specialism and focus – everything that those running advisory model portfolios need.
For those who do choose this route, more will head down the discretionary route as long as the sums add up. Those who choose to stay advisory will find some new kit to help them. Customer relationship management providers have solutions to help with gathering client consent if all your clients are online, and some providers are building true auto-rebalancing, which removes the need for client consent – as long as you are only rebalancing back to an agreed allocation.
