Platforum: Platforms and the rise of model portfolios

By Richard Bradley

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Wealth managers (aka discretionary fund managers, or DFMs) can be some of the severest critics of platforms – and it turns out that some of the platforms loved by advisers are the ones that the wealth managers love to hate.

Many wealth managers have found that third-party financial advisers are providing one of the fastest-growing markets for their services. With advisers increasingly focused on financial planning rather than investment, outsourcing through the use of multi-asset funds and third-party discretionary services – both models and bespoke – has flourished.

Outsourced model portfolio services on platforms have proved to be one of the most promising growth areas, enabling wealth managers to tap in to the £541bn adviser platform market.

But the world of platform MPS is not all it’s cracked up to be – as Platforum researchers have discovered for our report on the wealth management market. DFMs’ ire has been pointed at some platforms that they often deem to offer woeful administration of model portfolios.

Availability of funds on platform

The range of funds available on some platforms was arguably wealth managers’ greatest complaint. Platforms tend to wait for enough demand from advisers before they get around to onboarding funds. Some platforms have a relatively high bar. Unless an adviser expects to invest significant amounts of their clients’ money, platforms won’t waste their time on it.

This has a knock-on effect for wealth managers, who find that they don’t have the range of investments they want or that the range differs between platforms, making their portfolios inconsistent.

Fund and transactional charges

Fund charges vary from one platform to another, reflecting the different leverage each fund has in the market. This may be great for competition, but means that a wealth manager’s portfolios will perform differently between platforms, negating some of the potential benefits of scale.

Transactional charges also vary across platforms, affecting the tolerances before rebalancing becomes worthwhile. This is particularly relevant for listed investments like ETFs and investment trusts – which platforms are notoriously bad at facilitating in model portfolios.

Efficiency struggles

Many wealth managers moaned about outdated platform technology, particularly around communication. A few mentioned even having to resort to faxes to communicate instructions to platforms. Others mentioned the lack of essential APIs.

Wealth managers complain that platforms are stopping them scaling their services to cut costs and increase efficiencies. They tell us of often having to manually unpick errors one by one with individual transactions or clients. One wealth manager cited a rebalancing exercise that stopped in its tracks because of a single client’s withdrawal, which generated a host of trading errors.

The larger the amount of money wealth managers run on platforms, the more mistakes they see. Growing model portfolios should produce growing economies of scale rather than scaling up the errors.

A particular bugbear was Mifid 10 per cent drop reporting. It should be relatively simple: the wealth manager has the responsibility, the platform has the data, while the adviser is the comms conduit to the client. But this chain of responsibilities has all too often broken down.

Distribution vs investment philosophy

Dealing with platforms is ultimately a decision about weighing up the opportunities to be gained from expanding the breadth of distribution against challenges posed by the platforms’ limitations. Working with more platforms enables wealth managers to reach more advisers and manage more assets. But each additional platform places additional constraints on portfolios and impacts on how easily the model portfolio service can scale.

Some wealth managers said they were starting to push the decision back to the financial advisers and (via charges) the end-investors. Wealth managers say they are unlikely to turn down business, but MPS charges might end up higher on platforms that are inefficient. Volume discounts might also be reserved for business administered on those platforms that are most efficient.

Platform winners and losers

The specialist end of the platform market has become more important for advisers and our research has reflected this evolution. We expect more advisers to shift towards platforms that are optimised for their particular investment propositions, rather than the more generalist platforms.

Firms such as 7IM, Praemium and Parmenion are more like investment proposition platforms than open-architecture fund platforms. Plenty of platforms are also integrating their own wealth management and multi-asset arms, becoming providers of centralised investment propositions as well as distributors. Providers such as Octopus-owned Seccl and its partner, P1, offer off-the-shelf platform technology that enables advisers to operate their own purpose-built platform for their particular investment proposition.

Wealth managers operating MPS across several platforms rated some platforms far better than others. Interestingly, their views were often at odds with those of advisers using platforms. Several platforms received praise from wealth managers, most notably Standard Life Wrap. Despite being a favourite of advisers, Transact came in for criticism from wealth managers, as did Aegon and Aviva.

Richard Bradley is research director at Platforum. This article is an extract from Platforum’s UK Wealth Management: Market Overview report

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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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