Background

The growth in the use, by Financial Advisers, of Discretionary Fund Manager's Model Portfolios on platforms is well documented and is set to continue as advisers seek to offer their clients a professional investment service and de-risk their own businesses. 

Advisers are turning to DFMs to outsource investment decisions and navigate complex regulatory requirements. DFMs offer extensive market research capabilities and can offer sophisticated investment strategies and techniques, reduce business risk, and make better-informed investment choices for clients.

DFMs often use Model Portfolio Services (MPS) to access a broader and more diverse range of investment options. MPS have grown in popularity and are now widely adopted across the sector. NextWealth’s MPS Proposition Comparison Report 2022, highlighted that just over half of financial advisers say they use discretionary MPS, and 21% expect to increase their use in the next 12 months. The availability of a wide range of DFMs has become an integral part of advised platform propositions and a key consideration for financial adviser firms due diligence considerations.

Challenges

However, while MPS offers a key component of an adviser’s centralised investment process and their client proposition, DFMs themselves face the costs and complexities of managing their MPS across multiple platforms. One of these challenges is that as investments go through different market cycles, their performance may deviate from the initial model investment objectives. Therefore, DFMs are required to regularly review and realign investments to ensure continued alignment with the model, by conducting a process called rebalancing. Rebalancing introduces friction in the interactions between DFMs and the investment platforms they utilise, with platforms often using different operational procedures and reporting formats from each other. When DFMs perform rebalancing on their model portfolios, they rely on Management Information (MI) to evaluate the current allocation of assets and identify what adjustments are needed. MI provides valuable insights into performance, portfolio characteristics and risk exposures – all of which are crucial for DFMs to get a holistic view of investments, and make informed decisions. However, inconsistencies in the MI reporting format and data presentation across different platforms creates a significant operational overhead for DFMs and make this a challenging process to manage. These challenges are not limited to just one company and are sector-wide. The lack of standardisation between platforms has created obstacles for DFMs to seamlessly manage portfolios and access accurate MI.

Scoping

In Q4 2021, Criterion undertook a scoping exercise with a group of DFMs and investment platforms, which confirmed that Standards to facilitate data integration for these processes would be a significant enabler for the reduction of both costs and risks. Providing DFMs with a consistent MI data set will help to streamline the analysis that they need to perform in respect of each platform, where their model portfolios are available. Moreover, delivering a consistent way of specifying trades that critically avoids any need for manual keying-in and re-keying across multiple platforms will not only streamline those processes but also help to manage the associated operational risks and potential mitigation costs.

The solution

With this in mind, Criterion is developing a broad range of MPS data, process and technical Standards across MI Reporting and Edit Model and Rebalance to support DFM and platform organisations. These Standards will help to significantly de-risk key actions, enable scaling up of processes and automate core activities.

Not only will DFMs benefit from these Standards, but investment platforms will too. Onboarding DFMs who are familiar with an industry-Standard approach to managing model portfolios will be easier and less risky for the platforms that support them and will make platforms that support the Standards more attractive to DFMs. Finally, both platforms and DFMs can more easily demonstrate to adviser firms, as part of their due diligence considerations, that they have invested in greater standardisation, integration and automation to improve the management of model portfolios and to enhance the adviser and customer experience.

Get in touch

The draft version of the MPS Standards will be published in due course. If you are interested in our MPS Standards, please contact [email protected].