Financial advisers are increasingly comfortable with the idea of outsourcing, recognising it reduces regulatory risk, helps improve productivity and allows them to focus on their greatest priorities. At the same time, precisely how and where they outsource is still open to debate – not least, the choice between unitised and model portfolio service (MPS) options.
The latter have been ahead in the popularity stakes for some time now. According to the latest NextWealth MPS tracking study, assets in discretionary MPS offerings grew by more than a third (36%) in the 12 months to September 2024, with the increase driven by strong markets and a shift away from advisory and bespoke discretionary models.
In contrast, unitised options have – until recently – resonated less strongly with advisers. Platforum data noted net flows for wealth managers’ unitised portfolios were negative between 30 June 2023 and 30 June 2024. It also shows fund-of-fund ranges of UK wealth managers sat at around £80bn at the end of June 2024, with any increases effectively attributable to investment gains.
“Model portfolios outside a tax-wrapped environment can suffer CGT on rebalancing, which is largely outside the control of the adviser.
Nevertheless, the Schroders UK Financial Adviser Survey 2024 revealed a jump in the proportion of advisers planning to put their clients into unitised multi-asset funds. It found that, among advisers planning to outsource investments, about a third (35%) intend to allocate to multi-asset funds – up from 27% at the same time last year.
Immediate catalyst
The immediate catalyst for the shift, suggests the Schroders report, has been the changes to the capital gains tax regime in the October Budget. “The CGT changes announced in the recent budget are likely to be a factor in driving this increase,” it argues. “Model portfolios outside a tax-wrapped environment can suffer CGT on rebalancing, which is largely outside the control of the adviser.”
This has long been an advantage for multi-asset funds over MPS options. In multi-asset funds, gains can roll up free of CGT, whereas for MPS, small movements can trigger tax liabilities. This can also create an administration problem, making it more difficult to keep track of liabilities. Of course, most clients will have their assets in tax-wrapped options, but it can be a headache for those with assets that exceed the allowances.
Terry Huddart, digital director at the Lang Cat, says he is starting to see broader use of onshore and offshore bonds to tackle this problem. “With onshore and offshore bonds, they are still taxable,” he say, “However, you can do tax-deferred and you have the ‘thin-slicing’, so tax can be much better managed through a bond wrapper than for a general investment account.” For others, however, multi-asset funds would be a more straightforward solution.
Cost considerations
There are other considerations for investors when choosing between multi-asset and MPS options and, as may be expected, cost remains a significant factor for many advisers. MPS solutions have come down in price, with Nextwealth’s most recent survey finding costs for MPS almost halving in three years – from 1% to 0.54%.
Research by Downing Fund Managers confirms the continuing significance of cost, finding that 30% of advisers considered the higher fees associated with funds-of-funds to be more important than client risk profiles, when deciding between recommending funds-of-funds or MPS options. Some 26% of advisers cited client risk profiles as the main factor in their decision-making process, with 24% selecting performance and 22% choosing a client’s preference for transparency and control.
These findings were echoed by the Platforum report, with funds-of-funds criticised for their high pricing. At the same time, it found that passive funds-of-funds, where pricing was more competitive, saw stronger inflows. Multi-asset groups are increasingly working to bring down costs. The Downing Fox funds, for example, aim to have ongoing charges of 1% or less.
Performance differences?
Performance comparisons between multi-asset and MPS are more difficult. Not only are the groupings not exact equivalents, the stated performance of MPS products may not be what clients see in practice, owing to the difficulties of implementing MPS on platforms. The Defaqto MPS Comparator Defensive – Platform sector, for example, shows average one and three-year returns of 8.6% and 2.3% respectively. That compares with 9.1% and 0.7% for the IA Mixed Investment 0-35% Shares grouping.
In higher-growth sectors, multi-asset funds have tended to outperform MPS options. For the Defaqto MPS Comparator Balanced – Platform sector, for example, the average one and three-year returns are 13.6% and 8.2% respectively. For the equivalent multi-asset sector – the IA Mixed Investment 40-85% Shares – the numbers are 14.9% and 9.6%. Multi-asset funds undoubtedly have more flexibility, which should, in theory, lead to better performance.
Annalise Toberman, associate research director at Platforum, points out that available funds and share classes vary from platform to platform, so wealth managers tend to adopt a ‘lowest common denominator approach’ to fund selection, only using funds that are available across multiple platforms. “This may restrict the use of, for example, exchange-traded funds, investment trusts or private asset funds within model portfolios, and may encourage commoditisation,” she adds.
Flexibility and ease
The latest Platforum survey found that only half of all wealth managers include high-liquidity, low-cost investments in their model portfolios and only around a third use investment trusts. “All other things being equal, a unitised fund should beat an MPS, because a unitised fund can just do more stuff,” observes Ben Conway, chief investment officer at Hawksmoor Fund Managers. The Hawksmoor team use a lot of investment trusts in their portfolios, for example, which they believe contribute to performance over time.
One final consideration would be ease-of-use. The problems of implementing MPS on platforms are well-documented and there can be little doubt that multi-asset funds are a ‘cleaner’ solution, with no risk of clients being out of the market during a rebalancing, or different clients seeing different performance. If that situations persists, multi-asset may end up being the Consumer Duty-friendlier option.
Some groups now provide hybrid offerings – for example, Quilter, Schroders and Waverton have launched partially unitised options. This approach may present a solution to some of the difficulties of implementing MPS on platforms and the CGT problems – and thus may come to be more widely used. Watch this space.
