By India Clegg, Solutions Architect, Bravura Solutions
There has been a boom in model portfolios services (MPS) in the last few years, and their popularity on platforms continues to grow. But complexity is building and, left unaddressed, could even reverse their impressive growth trajectory.
Created in the early 2000s, discretionary model portfolio services (MPS), are a relatively new introduction to the world of investing, but they have surged in popularity in recent years.
A report by NextWealth and Criterion revealed a 28% increase in assets within discretionary MPS, reaching £123 billion by March 2024. Many advice firms have adopted MPS, with 44% currently using them and one in four firms (24%) planning to increase their usage within the next year.
Advice firms favour discretionary model portfolios because they simply lack the resources to comprehensively analyse and actively manage investments for each client. Outsourcing to a specialist Discretionary Fund Manager (DFM) frees up advisers’ time to concentrate on financial planning, forming deeper client relationships and, ultimately, growing their business.
Increasing Complexity
As the popularity of MPS continues to grow, so too does the complexity these funds create. DFMs often manage multiple versions of their models, each of which might have different fee structures, share classes, fund availability and fund domicile. This complexity creates significant operational challenges since existing processes weren’t designed for such a dramatic expansion.
For instance, a DFM with six or seven core models might be managing many more variations across multiple platforms, each with its own processes for rebalancing and reporting. The platforms themselves add another layer of complexity, as they will have their own processes for rebalancing and reporting.
Rising Operational Burden
While the growth of MPS benefits advisers and consumers, it has also increased the operational burden on DFMs. They now manage multiple versions of models across different technology systems, each with its own rules and restrictions imposed by platforms.
DFMs don’t control these platforms and must rely on workarounds, often involving manually intensive interventions and checks. This raises the risk of errors and increases costs, undermining the benefits to consumers by making the service more expensive and potentially exposing investors to disadvantages, such as being out of the market during a rebalance.
Whose Responsibility?
The industry acknowledges the problem, but responsibility is fragmented among DFMs, platforms, and advice firms. While each party may act appropriately on their own, the overall system suffers from inefficiencies.
Platform providers tailor their solutions to their own needs, without concern for consistency across the industry. DFMs could benefit from a unified approach, but the cost and lack of influence over platform providers make this difficult, resulting in a stalemate with no clear solutions emerging.
Potential Solutions
At Bravura, we’ve developed solutions to address this issue, including a microservice that supports MPS within a single platform. It allows DFMs to define models, set charges, manage assets, and rebalance easily.
More recently, we have been working on a wider proposition called the DFM Hub, which would effectively create a centralised management tool and simplify the model creation process from DFMs, making it easier to integrate, manage and rebalance model portfolios across multiple platforms.
We believe such innovations could enhance competition in the platform space and lead to better outcomes for consumers. We encourage industry-wide investment and innovation to tackle the existing challenges.
The Future of Model Portfolios
MPS have helped advisers focus on their valuable client work by providing cost-efficient outsourced investment solutions. But there may come a tipping point where advisers find MPS are no longer delivering the outcomes they expect at the cost they and their clients want. It’s only through effective collaboration and innovative technology that this issue will be resolved. We are urging platforms and DFMs to think carefully about how we can improve processes together to support a promising future for model portfolios. If we do, it could represent a win for all involved.
Get in touch to find out how Bravura can help you today: [email protected]
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