Disjointed and manual processes used for the management of model portfolios on platforms are leading to inconsistent and unreliable outcomes for end-clients.

NextWealth’s report – a deep-dive into the processes for building, editing, rebalancing and reporting of model portfolio solutions (MPS) on platforms – is published today in partnership with Criterion, an independent Standards organisation that operates as not-for-profit. Criterion is working with platforms and discretionary managers to encourage the adoption of Standards for MPS reporting, data and processes.

“Explosion" of assets in MPS

The COO of a DFM interviewed for NextWealth’s report commented: 

Nobody knew that MPS was going to become what it has become. Everything has pushed more IFAs towards it. We have processes that were not designed to cope with the world we are now in.

According to NextWealth’s latest MPS Proposition Comparison Report, published last week, assets in discretionary model or managed portfolio services (MPS) grew 28% in the last 12 months to reach a new high of £123 billion.

Inconsistent treatment of clients

One of the greatest concerns highlighted in the report is the inconsistent treatment of clients during the rebalance of a model portfolio and the risk of clients being missed from a rebalance.

Billy Burnside, Managing Director of Criterion comments: 

Within our MPS Standards framework is a pre-rebalance report that would indicate to a DFM which clients will successfully rebalance and if that doesn’t include 100% of clients in the model, then it would highlight the reasons for this, for example that a withdrawal is already in process. A post-rebalance report would confirm the success or failure of the rebalance.

Through the lens of the client

Emma Napier, Consulting Director of NextWealth comments: 

Other reports have explored some of the technical challenges of managing MPS on multiple platforms, and the conclusion often shifts the responsibility between DFMs, platforms, software providers and platform tech providers. We’ve spoken at length to all of those parties for this report, but ultimately, we decided to apply a client lens to the problem because it’s client money and client outcomes that can be at risk.

Two significant findings of the report include:

1 - Advisers need to be equipped to form an accurate view of MPS management processes

The responsibility for client outcomes ultimately sits with the adviser. Advisers need to be equipped to accurately assess the risk and operational resilience of the solutions they recommend for their clients through their due diligence processes.

Emma Napier suggests: 

If advisers don’t already dedicate a section of their due diligence questionnaire to exploring the robustness of processes, that would be a great first step to minimising risk to client outcomes.

Some questions an advice firm might ask of a DFM partner are:

  • What processes do you have in place to ensure that all clients invested in a particular model will successfully rebalance?
  • In what timeframe do you aim to complete a rebalance, and if the process takes longer, how do you mitigate against missed opportunities and time spent out of market?
  • How automated is your rebalancing process and how reliant is it on manual four-eye checks (in which data is visually checked for error by an additional analyst)?
  • Does your rebalancing process involve rekeying data across spreadsheets?

 

2 - Standards are not a magic wand but part of the solution

While industry leaders interviewed for this report agree on the merits of a standardised approach, the solution is not a magic wand. Standards are but are an important part of the jigsaw. The report also identifies a number of obstacles to improving management of MPS on platform, especially cost, development priorities and technical capabilities. 

Despite these challenges, when looking from a client perspective at how their hard-won assets are open to manual errors because of disjointed processes, the report concludes that it would be difficult to make the case for any further non-standardised development, particularly given the enormous growth to date, and predicted continued growth, of MPS.

Billy Burnside comments: 

Criterion has a long history of supporting the industry to find solutions to common problems. Our hope is that MPS Standards will serve as a ‘kitemark’ to signify to advisers that the DFM and the platform that will manage their clients' money, use robust processes.