Fresh fears over the suitability of model portfolios have surfaced, five years after the regulator first warned about the post-Retail Distribution Review ‘panacea’ for advisers’ investment propositions.
Findings by fund researcher FE have suggested the majority of advisers use just one model portfolio service for all of their clients, a discovery which “shocked” the data firm and raised concerns consumers are being shoehorned into unsuitable investments.
For IFAs, the regulator has explicitly said they “should not restrict advice to certain model portfolios, or as the default solution, regardless of whether these can be tailored for individual clients”.
But when quizzed on why they use so few investment options, the advisers said they face an impossible choice between model portfolio services too opaque and complex to comprehensively review, and increasing demands from the regulator for granular due diligence.
Mika-John Southworth, marketing director at FE, said he was “pretty shocked” by the survey results, which found 52 per cent of advisers only use a single model portfolio service provider, and 35 per cent use between two and four.
“We assumed [advisers] would have two or three providers. Only using one which from a due diligence perspective could be quite challenging.”
The advisers surveyed blamed a lack of transparency and insufficient holdings information for making comparisons between model portfolio providers difficult and extremely time-consuming.
Ian Cornwall, director of regulation of the Wealth Management Association, argued many providers went “above and beyond” what is required when providing information to advisers.
The Financial Conduct Authority declined to comment on the FE findings, but has repeatedly stated one of the root causes of “consumer harm” is failings in advisers’ research and due diligence.
It first voiced concerns about “increased reliance on asset-allocation tools and model portfolios” in 2011, as advisers sought to meet new demands for robust, repeatable, suitable investment processes post the 2012 introduction of the RDR.
Model portfolios allow advisers to pre-determine what will generally be their asset allocation for certain investment objectives or attitudes to risk, and to distil their product research accordingly.
Most are run by discretionary fund managers as ‘outsourced solutions’ – the liability for the investment advice remains with the adviser and the DFM’s often high costs are passed onto the client.
“There is growing recognition among DFMs of the need for greater transparency, but much more needs to be done, and for more urgency – ultimately it is the end consumer who is going to suffer otherwise,” Mr Southworth said.
At 187, the sample of advisers FE surveyed was fairly small. But Mark Polson, principal at consultancy the Lang Cat, said these latest findings chime with those recently uncovered by his own firm’s research.
“We found when we tried to put ourselves in an adviser’s shoes to select a model portfolio is there was no meaningful way they could get the data they needed in a reasonable timescale,” he said.
“They would need to employ someone who does that for a living.”
Yet in its latest paper on due diligence from February, the regulator stated: “We found all firms, regardless of size or type, can carry out good research and due diligence. We saw examples of small firms, including those with a single adviser, carrying out robust research and due diligence.”
However it said it remained “disappointed” by some of the due diligence it found.
Tom Hawkins, Old Mutual Wealth’s head of proposition, admitted the industry needed to raise standards, but it was improving the “quality of reporting and transparency, which facilitates efficient and effective comparison and analysis”.
Mark Pittaccio, head of intermediary distribution at Charles Stanley, said: “Transparency is crucial for Charles Stanley in our dealings with financial advisers.”
Jason Dewar, a senior consultant on Distribution Technology’s asset and risk modelling team, said the lack of a consistent reporting standards meant asset managers only release what they think is important.
“It is quite common to see differences in the way underlying holdings, asset allocations, and charges are presented.”
Discretionary fund manager Brooks Macdonald declined to comment while Brewin Dolphin and Seven Investment Management were asked to comment but did not respond.
Richard Ross, director of Norwich-based Chadwicks, said his firm doesn’t use DFMs, but that “a single DFM using a range of risk-rated models is appropriate for lower value portfolios in accumulation where the portfolio represents a large proportion of overall investable wealth”.
“It becomes progressively less suitable for clients with a range of financial assets (such as a DB pension fund) and for clients in decumulation I cannot easily see how the risks can be managed within a simplistic risk-rated model portfolio.”
