A few weeks ago we published a post on the difference between Managed Portfolio Services (MPS) and model portfolios on platforms. Given it was so widely read and shared on social media, we’ve decided to delve a little deeper into this topic. This week I spoke with John Jackson of Cornelian Asset Managers – a discretionary manager with a deliberate strategy of dealing directly with advisers, rather than making their services widely available through platforms.
The growth in discretionary model portfolios on platforms
As I’m sure you’re aware, the number of discretionary model portfolios available on platforms has grown exponentially over recent years. Back in March our research revealed 112 discretionary managers were offering their services via the five main platforms. Around the same time Dave Field, Head of Customer Service at Novia Global, advised that their platform featured around 70 discretionary managers – with approximately 40% of all new investments going into discretionary models. No doubt these figures have grown since then.
What’s been driving this growth? I think we can point to a number of things:
» An increase in adviser appetite for investment outsourcing. Advisory firms are realising the benefits that can come with tapping into a fully resourced team of investment professionals to support the delivery of their centralised investment process – freeing up their time to focus on financial planning and higher value client facing activities.
» Discretionary models: a first step towards outsourcing. For those adviser firms that previously ran their own advisory models on platforms, appointing a discretionary manager via a platform is often the first step toward investment outsourcing. While the investment philosophy and approach to managing portfolios will change, the client experience is very similar given the existing interface (wrap) and reporting process remains in place. The adviser benefits from the operational efficiencies that come from using a discretionary service, although with very little ‘interruption’ to the way they do business today.
» Broader market access for discretionary managers and platforms. Platform models open up new market opportunities for both discretionary managers and the platforms themselves. Discretionary managers gain access to distribution via the financial intermediary market and platforms gather assets that previously went direct to the discretionary investment houses.
It sounds like everyone wins – or do they?
While the market is growing and advisers can benefit from the plethora of discretionary investment offerings available to them via platforms – many of which were previously unknown to them – do platform models offer benefits over Managed Portfolio Services (MPS) delivered direct? John Jackson of Cornelian Asset Managers points out that there a number of factors that should be taken into consideration.
Cornelian offer a suite of actively managed multi-asset funds and an in-house MPS that invests in these funds. They also offer five models on the Novia platform, managed using Distribution Technology’s capital market assumptions to sit below upper expected volatility limits.
The challenge of offering discretionary model portfolios via a platform is that, unlike segregated portfolios, the discretionary manager does not have visibility of individual client accounts. Therefore, they are unable to see or manage a client’s cash position or account for capital gains. Furthermore, the manager is restricted by the type of instruments they can hold.
Cornelian restricts its investments to daily priced OEICs or ETFs to ensure that all investors are treated fairly. This avoids the situation that would occur if, say, an Investment Trust was purchased for Cornelian’s funds and also for its model portfolios. The deal placed directly by Cornelian for its funds or direct clients would be executed immediately, whereas the deal routed through the platform would be dealt upon later. This challenge of ensuring that clients are not disadvantaged can lead to a less rich investment experience for investors in model portfolios on platforms. Another layer of complexity is added by the trading and settlement policies of each platform, which can differ by hours or days following the receipt of an instruction.
Trading in their own nominee, Cornelian can ensure that clients holding accounts directly have access their ‘best thinking’, actively managed, with portfolio changes implemented at the same time.
Using a multi-asset fund solution or MPS direct can also be more tax efficient, given trading within the funds does not trigger tax events and the client’s CGT allowances can be managed at account level.
Regulatory responsibilities and client reporting
John points out that there is a distinct lack of clarity around where the regulatory roles and responsibilities lie in the relationship between discretionary manager, platform and financial adviser when using platform models.
Those holding discretionary permissions are required to provide client level reporting, however, when it comes to models on platforms there is no visibility of the end client so such reporting, by the discretionary manager, simply isn’t possible. Reporting can only occur at the ‘model’ level and will also be impacted by trading and settlement policies.
This reporting issue will be further complicated by MiFID II. One particular point to note is the requirement to report when a client portfolio falls in value by more than 10%. Although this task should fall to the discretionary manager, based in the nature of their permissions, it simply isn’t possible without a clear line of sight to the client. The onus must therefore fall back to the adviser, with the support of the platform – contradicting the current reporting rules. A grey area that needs to be addressed.
In summary, there are numerous benefits of models on platforms although in Cornelian’s view the option that offers the greatest transparency, opportunity for active management and potential tax benefit for clients is to invest directly into the multi-asset funds or in-house MPS.