No size fits all for advisers and third-party portfolio management

By Richard Bradley

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If clients think that advisers take broadly the same approach to investing as each other, they could not be more mistaken. Propositions vary considerably across firms as advisers get to grips with what they think are the right approaches for them and for their clients. In a rapidly evolving environment, it is hardly surprising that propositions are also on the move.

Platforum asked a sample of 200 advice firms of different types and sizes what investment strategies they used and what percentage of advised assets were managed via each of the strategies. As in previous years, we also talked to advisers directly in qualitative research over the phone and at roundtable discussions.

The chart shows how many firms use each solution and how much as a percentage of assets under advice they place within them. Advisers typically operate multiple strategies, hence the blue bars adding to well over 100 per cent.

So, 60 per cent of adviser firms use multi-asset funds for at least some of their clients. However, just 17 per cent of their advised assets were then held in these types of funds.

Advisers mostly use multi-asset funds for less wealthy clients, where other solutions involving a range of different funds would not be practical. This accounts for the relatively large differential between the high number of firms using multi-asset and the much smaller proportion of assets under advice. The position is very similar for multi-manager funds, although they aren’t as popular because of their generally higher costs.

There’s a minority of advisers using multi-asset and multi-manager funds, who construct portfolios of several such funds, even for quite substantially-sized portfolios. This is redolent of the days of life office managed funds, when advisers often recommended investment in a range of provider offerings, leavened (or weighed down – take your pick) by some with-profit policies.

The strategy attracting the largest proportion of assets under advice continues to be model portfolios that advice firms run in-house. These are advisory models with quite some variety in individual advisers’ adherence to the models. Some firms require strict conformity, but elsewhere advisers can choose between similar funds or even go off-piste entirely. Of course, the advisory structure means that there’s likely to be considerable drift from the model as a result of switching and rebalancing happening at different times, or perhaps, not at all.

The in-house model portfolio approach implies some degree of governance and consistency in decision-making – quite a lot in many cases. The continuing popularity of advisers picking single strategy funds for clients in ad hoc portfolios suggests that many firms may have similar processes for that decision making but have not yet formalised it into model formats. This means there is still some scope for fund managers to sell their propositions to individual advisers and make inroads into the market.

Discretionary fund managers are doing quite well, and there remains room for growth. Just under half of advisers use third-party DFMs for either model or bespoke portfolios – 36 per cent use DFM models and 27 per cent use bespoke (with a few advisers using both). But they are still trailing with the proportion of assets under advice they run: 15 per cent for models and 6 per cent for bespoke. This may be because advisers can be reluctant to pass over one justification for their asset-based fees – their investment expertise – to third parties. Or it might be at least partly because a perception can exist that DFMs are much of a muchness, with little to distinguish or differentiate them from their competitors. It is perfectly possible for some advisers to use all these different strategies or just a very few of them. However, the rise and rise of centralised investment (and retirement) propositions is increasingly systematising the way that advisers run portfolios. This is leading to more advisers using third-parties for managing investments, whether that is with multi-asset funds, model portfolios or discretionary management.

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Our work covers the adviser, direct-to-consumer (D2C) and retirement markets, the influences in fund distribution in the UK and the investment distribution landscape in Europe and Asia. We work with platform providers, fund managers, life companies, advisory firms, distributors, partners of platforms and platform users. We help providers with strategy, market intelligence and proposition development. We also work with advisor firms, helping with their platform selection and due diligence. Content and insights are delivered in reports, through live events, in person briefings and webinars.

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