Centralised investment proposition construction on platforms

Snappy title, huh? Recently I've been spending the majority of my time thinking about how advisers are putting together their investment propositions on platforms. Actually, scratch that. Treat anyone who starts an article with a sentence like that with the suspicion it deserves.

When we help adviser firms with platform suitability, we kick things off by taking a step back. Before getting in the thick of charging schedules, wrapper types, client reporting et al, we get advisers to tell us what they need to get out of day to day platform life.

In truth, I've been spending my time thinking about many things including, but not exclusively, when my impending mid-life crisis might kick in, whether Andy Murray will ever get back to his best, where to go on holiday next year and why I can't start an article like a normal person?

However, in the context of what is appropriate to share in an article for the financial advice profession, oh let's just say I've been spending most of my time on that first investmenty thing I mentioned.

When we help adviser firms with platform suitability, we kick things off by taking a step back. Before getting in the thick of charging schedules, wrapper types, client reporting et al, we get advisers to tell us what they need to get out of day to day platform life. A huge part of this, often the biggest, is how their centralised investment proposition (CIP from hereon for our sanity) is constructed.

The market

Now, research and opinion varies from source to source, but if we can proceed on the basis of the following statements then we can stay friends and crack on:

  • The vast majority of business written on platforms flows via a CIP and
  • Of that, the majority is held in model portfolios and
  • There has been a continuous upwards trend for investment outsourcing or in other words
  • We see an increasing trend towards the delineation of the advice process between financial planning and investment management
  • but isn't that just a posh way of saying the same thing as the bullet before?
  • Yes, but we see a related trend within the growing lifestyle financial planning movement where the planning element takes precedence, but the investment process for many stays insourced (urgh, horrible phrase again) by way of passive multi-asset/multi-manager or suchlike.

The market as it stands then can be simplified (of course, there will be overlap and outliers) into the following broad segments:

  • Use multi-manager/multi-asset funds
  • Run model portfolios on an advisory basis
  • Run model portfolios on a discretionary basis
  • Fully outsourced (DFM model portfolio service or full discretionary)

Now, because everyone likes things broken down into manageable chunks, let's take a look at each of these approaches in turn, and some of the associated issues with running these kind of CIPs on a platform.

Multi-manager/Multi-asset

The big win here is simplicity for both advisers and investors. The concept is a straightforward one for advisers to explain and for investors to understand. This simplicity is enhanced by the fact that any trading and rebalancing is carried out by the fund manager/s, rather than being the responsibility of the adviser (and potentially the investor too).

This in turn makes it tax efficient. There are no capital gains tax implications from buying and selling unwrapped assets because it happens within the fund. And it's extremely portable too. Most fund ranges are available on most platforms.

The biggest drawback, as we see it, is the single line of stock issue. How does the adviser demonstrate the work they're doing for the client when the investment report is just a single line? Standard Life Investments have attempted to address this with its lookthrough tool for MyFolio but such initiatives are few and far between.

Running advisory models

This enables you to keep and position the investment expertise within the firm. For small firms it can work well, enabling them to differentiate by #demonstratingaddedvalue to the client. "I've noticed that your investments are slightly out of line, I can fix this for you" can do wonders for the ongoing client relationship...provided you do fix it of course.

That's a compelling argument but the flip side to this is the admin required to run this. Whether that be version control and the long trail of dead of model portfolio naming conventions (Save as "Final_Final_Final_October18_v3") or the act of gaining client permissions for an ad-hoc rebalance, it all adds up to a cost to your business.

It can be difficult to pull this off and remain scalable. We hear lots of testimonials from small firms who have tight process control and almost relish the challenge of it, but it's not for everyone.

Own models – discretionary basis

You're firmly in control of your own destiny and can focus on investment management as opposed to platform admin. No more waiting for client permissions and farewell to messy admin, particularly if you choose a vendor (such as Seven IM, Parmenion or Standard Life) that is really kitted up to facilitate discretionary investment.

The most obvious downside to this approach is that obtaining discretionary permissions is an expensive business. Expect your cap ad requirements and PI cover costs to increase significantly.

Full outsource – DFM MPS or full discretionary

The most obvious reason to go with this approach is to focus your activities on financial planning and market your business accordingly. Let the planners plan and leave the investment to the specialists. Or a hybrid approach in line with new PROD guidelines i.e. I manage X segment myself and segment Y is outsourced.

Again, a compelling argument but this throws up a number of issues, particularly for platform usage, including:

  • It's often expensive – clients pay advice charge + DFM access cost + platform charge + OCF of portfolios
  • Getting a robust agreement in place
  • The portfolios are rarely portable.
  • Very, very difficult to do meaningful, side by side research
  • Tax consideration if your client has a GIA

What does the future hold?

Well, the future will have to wait as we're rapidly running out of word count, not to mention we've barely scratched the surface of the topic. But if the good ship Capita lets me back onboard next quarter then we'll use this as a starting point and return with a sequel to this article that lays out our views on the future, including some predictions on where we think the market might go.

As for the answers to my other questions at the start? Any day now, hopefully, south of France and because of the lang cat.

See you next quarter.

Visit www.langcatfinancial.co.uk for more from Steve and the rest of the lang cats.