Fees for platform-based model portfolio services have been declining, according to research consultancy Platforum, as lower cost providers enter the market and some existing providers cut their charges.
From a cost perspective, MPS have consequently become more attractive. But with hundreds of model portfolios and dozens of providers to choose from, what factors should be considered when choosing an MPS?
Fees, risk and return are the obvious areas that dominate the selection process, says Craig Wright, managing partner and head of UK IFA services at Evelyn Partners.
“Separately, financial advisers should consider factors such as the frictional cost of trading the portfolios on an annual basis.
“For example, let’s say a DFM model rebalances monthly, and it takes 48 hours to settle the trades. The client may be missing out on as much as 24 market days. An expectation of the number of days out of the market on an annual basis should be understood.
“I would also recommend asking questions about the depth of experience the manager has with executing the models and the platforms selected. Questions could include: ‘Explain in detail the trade and checking process for a rebalance.’”
Choosing a suitable MPS is therefore important to maximise the benefits and minimise any disadvantages.
As Copia Capital managing director Robert Vaudry highlights, when outsourcing to a MPS most advisers want to reduce risk and costs for clients, while delivering the best possible client outcomes.
“The aim is to give clients the benefit of specialist portfolio management and investment research and leave advisers more time to focus on the overall financial planning. To achieve these objectives, you need to find the right partner. This starts with understanding the MPS provider’s process.”
Questions to consider
Vaudry lists the following questions to consider: “Is it whole of market? Are investment decisions driven by asset allocation or stock-picking? Do they have strong fund manager knowledge? What risk management tools do they have?”
The logistics of working with that provider also need to be assessed, he adds. “Which platforms are they on? Do they target clients in accumulation, decumulation or both? Which risk-profiling tools do they map to?”
Finally, Vaudry says consideration needs to be given to how working with a specific provider will impact the advice firm. “Will they deliver efficiencies and remove administrative burdens, to reduce your costs and free up resources for more valuable client work? Will they help de-risk your business? Are you confident that they will deliver the best possible outcomes for clients?”
As the multitude of MPS options begins to narrow down during the selection process, which features might make a MPS more suitable for a particular advice firm or its clients?
