As the adoption of model portfolio services continues at pace, the most serious challenge to its continued growth is the complexity of implementing it on platforms. These well-documented difficulties have seen clients in the same strategy experience varying performance, or even prolonged periods out of the market. Even well-functioning MPS options often require significant work-arounds on the part of the provider.
The problem was laid bare in a recent study by Equisoft, which noted: “There are reports of rebalancing not being done correctly, of clients being left out of the market for long periods of time, and other processing errors. MPS providers report that they have to undertake significant manual processing to support their models on platform. If these increase, it will attract regulatory scrutiny, which could be onerous for advisers, platforms and MPS providers.”
Equisoft went on to argue that, ultimately, the growth of MPS could cause a “crunch” for the platforms on which they run, with its recent report showing 69% of UK-based financial advisers expect to have more assets under management in MPS in future.
“This is something the regulator should be looking at more,” says Nick Meredith, product director at Equisoft. “The whole ecosystem will not be able to cope.” Worse, it may actually serve to deter advisers, with Equisoft finding that, of those advisers who do not use MPS, half are “turned off” by perceived administrative difficulties.
Disparate motivations
What then needs to happen for the problem to be solved? Equisoft argues that, while MPS providers may be highly motivated to resolve the issue, platform providers have not shown the same inclination, with widespread acceptance of poorly functioning technology and inadequate workarounds.
According to Terry Huddart, digital director at The Lang Cat, advisers often do not see the work going on behind the scenes. “From an adviser perspective, they do not really see or feel any of the pain,” he adds. “All they do, when they are on their platform, is select the MPS provider from one drop-down option, and then they select the portfolio the client is going into from another. The model is then managed and rebalanced and funds may change – but all that is done by the MPS provider.”
The ideal situation would be for platforms to work together with MPS providers to build more robust technology around MPS – yet there are only tentative signs of this happening. Australian technology giant FNZ, for example, has been buying up platforms and has looked into a single-feed solution. Even if this comes to fruition, however, it will not cover all the platforms. Equally, some platforms are starting to use application programming interfaces (APIs), but there is still a lot of work involved.
For the time being, says Huddart, “No-one clever has come along and said, ‘Here’s a bit of software that has got an API into all the platforms, and you only need to complete one thing and it fixes it’. If somebody did that, they would be on to a winner.”
Clear differences
Nevertheless, there are clear differences between platforms – and ‘bad’ platforms moving to the same standards as ‘good’ ones would be helpful, if not a complete solution. Some platforms allow real-time switching, for example, so that the client is not out of the market.
There is no denying these are difficult problems to resolve – for example, not all platforms hold the same share classes and so it may be difficult to enforce uniformity. Equally, not all platforms hold the same funds, meaning MPS providers will have to tweak their portfolios and then ensure they remain in the right risk range and tolerance. Again, it is difficult to enforce uniformity.
Absent this ‘nirvana’, advisers can always switch – and MPS providers can encourage them to do so. Advisers, meanwhile, are increasingly recognising the risks and costs involved. If outsourcing becomes an administrative burden, it undermines its utility for advisers.
If advisers start to see different levels of performance between clients on different platforms, however, it may encourage them to take action. Indeed, there are signs of this happening already – research by Defaqto in 2024 showed one-third (34%) of advisers have changed one or more of their preferred platforms in the past year.
Partial unitisation
Some MPS providers are using a partial unitisation approach, which circumvents many of the issues. Waverton’s MPS, for example, comprises four ‘building block’ funds, which are run by the investment team. The group’s six mandates then hold different proportions of these funds to cater for different risk profiles, while the weightings are readily adjusted – usually within a single day.
This approach leads to fewer crystallisation events for CGT, points out Peter Stewart, senior strategic account manager at Waverton, in addition to greater transparency and circumventing the problem of consistency. It gives the managers a broader choice of funds within each individual building block – and the group only needs to ensure the availability of its four OEICs on the platform rather than all the funds within an MPS.
The problem here is it can all start to look a lot like a unitised multi-asset fund. Waverton is giving advisers greater flexibility over the asset allocation, but it will probably end up looking quite similar to a standard fund in the IA mixed investment sectors. That said, it compares favourably on cost – at 0.6% for the Conservative MPS option, for example, the Waverton MPS is somewhere in between a fully-unitised option and a traditional MPS.
There are still further options – for instance, technology group Bravura Solutions has suggested that platforms introduce a ‘micro-service’ to support MPS. This would enable DFMs to define models and charges, set fund availability, rebalance easily and make models available to specific advisers. Parmenion does a version of this, points out The Lang Cat’s Huddart, adding: “It does not distribute its investment solutions through other platforms, but sells them exclusively through its own platform, which reduces some of the friction.”
There is no single whizzy piece of technology that can resolve the situation – yet – but MPS providers do recognise the issues and are finding workarounds. Nevertheless, the space remains wide open for a disruptive technology provider to take on the problem – in the meantime, MPS providers continue to take the strain.
“While MPS providers may be highly motivated to resolve the issue, platform providers have not shown the same inclination.
