To answer that question, let’s start by being clear in this article on what a CIP is as the word ‘proposition’ suggests it might be a product but perhaps we should call it a centralised investment ‘process’. A CIP is simply a standardised range of investment solutions which an adviser firm has available for their clients or client segments. Perhaps it could also be described as a partnership which provides a comprehensive asset management solution suitable for a large percentage of the advisers’ clients with the ability to be adapted?

Either way it should enable the adviser to spend time on delivering real value-add activities to clients rather than fund picking and dealing with multiple investment managers and products on an ad hoc basis.

A CIP is reliant on a number of steps:

  1. Client segmentation
  2. Consistent delivery
  3. A range of possible solutions
Client segmentation

Good quality client segmentation will help an adviser to define the range of possible solutions required. Traditionally segmentation has been done based on client assets but this has been debunked as poor practice (See the Rory Percival article on PROD on our site) so increasingly advisers are giving consideration to criteria such as life-stage, needs, objectives and preferences.


Consistent delivery

A good CIP must meet several criteria in this area. It must be built in such a way that it avoids shoe-horning clients into a limited range of portfolios, continues to maintain alignment with the client’s attitude to risk and therefore anticipated level of volatility and returns and supports the monitoring and reporting of the client’s goals. Crucially though it must deliver consistent risk adjusted returns for clients across the risk spectrum so not to undermine the adviser’s suitability process.

The diagram below demonstrates good and poor examples of risk and return separation. Bad, unpredictable risk and return separation impairs the adviser’s suitability process as it delivers inconsistent outcomes, different to those expected at the outset.


A range of possible solutions

A key point to remember is that the CIP must be suitable for clients and a key concern of the regulator is ‘shoe-horning’. This is where the adviser attempts to force clients into an investment solution which does not deliver enough flexibility to meet customer needs. This lack of flexibility might relate to the range of risk buckets available, investment strategy (e.g. active, passive, ethical) and also any individual considerations e.g. tax, income requirements, costs. It’s therefore important to note that the use of a CIP doesn’t exclude the use of other options, it’s not all or nothing, it should be what’s suitable.

The CIP should also complement and support the financial plan and any partnership between the financial adviser and the provider should reflect this position.

Given the flexibility required, it could be argued that the ultimate business solution would be to find a way to provide customised investment advice each and every time that’s scalable, compliant and robust whilst not jeopardising the firm’s independence and objectivity.

However, the following research from Platforum demonstrates that there is a large range of solutions currently being used.

Model portfolios run in-house attract the highest percentage of adviser assets followed by those run by discretionary investment managers. However, the risks of running in-house portfolios (particularly if the adviser does not have discretionary permissions) continue to increase as:

  • The regulator expects a clearly defined process and research undertaken by qualified and competent individuals
  • The research, process and governance e.g. investment committees required is time consuming and expensive
  • There is an increased risk of shoe-horning unless sufficient portfolios are available
  • The MiFID II requirements for disclosure and reporting are onerous
  • Operating on an advisory basis and requiring client consent for every portfolio rebalance or amendment adds time, cost and risk to the business and can result in multiple versions of a portfolio requiring to be maintained

Coupled with the requirement to spend time with clients adding value through financial planning and coaching, it’s no surprise that an increasing number of advisers are looking to outsource their CIP. Last year the proportion of advised assets amongst smaller firms increased to 30% from 18% in 2013 (source, Defaqto) and the recent Nucleus census also indicated that around 35% of financial advisers would increase their use of Discretionary Managers and a further 10% would begin to use them.

In a recent whitepaper, PortfolioMetrix explained that whilst advisers are continuing to move to outsourced propositions these also don’t come without challenges as outlined below:

DFM Model portfolios. These are quick and easy to use for advisers but may not offer much in terms of a competitive advantage.  They don’t contain any level of customisation and there could be a question mark over shoe-horning if there is a limited range of models available.  Plus, no individualised rebalancing or CGT Allowance harvesting can be offered, and they suffer from risk mapping drift issues over time.

They are however available on third party platforms, which makes a transition from one manager to another easier (you don’t need to move the assets out of the DFM’s custody which is always painful).  Many also tend to be priced reasonably, have low minimums and don’t involve the DFM meeting the client which many advisers tend to worry about.

There are however still question marks over the relationship between the adviser and DFM as the majority of model portfolios are offered on an Agent as Client basis, which shifts most of the risk onto the adviser.

Traditional DFM Bespoke solutions. These can bring significant advantages to advisers for larger clients where the adviser wants to leverage the might of a larger DFM partner.  Clients are made to feel special with a portfolio built just for them, delivered in plush (expensive) surroundings by a well-tailored investment manager.  Often a nice ‘free’ lunch is thrown in as well.

However, some advisers are uncomfortable with the idea of losing control of the client relationship, the cost of the service, the minimums blocking out other family members and custody being part of the service.

Hybrid Discretionary Managed Services. This would be best described as combining the service of a traditional DFM in a more cost-effective manner whilst allowing the adviser to keep the client relationship firmly in their hands.

Technology can be used to provide a scalable, repeatable process with efficiencies of delivery. The adviser can take control of the key customisation levers of the portfolio, for example the amount of risk taken, the philosophical approach e.g. active vs passive and can easily change this should circumstances dictate.

Client assets are held by a third-party custodian/platform meaning that there is full transparency and also flexibility should the adviser or client ever wish to cancel the DFM mandate.

One of the key benefits of operating a CIP is that it enables advisers to spend more time focussing on their clients as individuals, with the focus shifting from the product to the process of planning and in our follow up article, we will explore the many ways that this will create a more valuable adviser firm and generate growth.


This article was created for DISCUS by our DFM partner, PortfolioMetrix. To find out more about PortfolioMetrix visit their webpage.