Model portfolios face ‘less efficient’ claim

Discretionary model portfolios came under fire at the latest Defaqto Investment Outsourcing Conference as being unsuitable for advisers’ clients.

In a debate on the relative benefits of multi-manager funds compared with discretionary services, Matthew Lamb, head of institutional and fund distribution at GAM, and Jamie Farquhar, head of sales for JPMorgan Adviser Solutions, questioned whether model portfolios were appropriate vehicles for investors.

Mr Lamb described model portfolios as “less efficient versions of funds of funds” and said there were issues with the service and whether it is offered on a segmented basis or on platforms.

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He highlighted the fact that because model portfolios on platforms were restricted to buying only the funds that were on that platform, they had less freedom to invest than funds of funds did.

He also criticised model portfolios for only rebalancing on a quarterly basis, preventing them from reacting quickly to significant market events.

Mr Lamb added that the costs on model portfolios were more opaque than on funds, while model portfolio services also didn’t have the requirements to produce factsheets and key investor information documents that funds have to do.

Model portfolios are also subject to VAT, which funds do not have to pay.

Mr Farquhar claimed that rebalancing model portfolios was a huge issue for discretionary firms and questioned whether all firms were treating customers fairly with their rebalancing processes.

He said: “I would question how they deal with clients investing at different times at different portfolio values and how that relates to rebalancing.

“Companies need to have very good mechanics and resources to monitor the level of drift in the portfolio very closely for every client in that portfolio.”

Model portfolios have grown in popularity in the build up to, then in the wake of, the RDR as advisers increasingly looked to outsource their investment decisions, but did not want to pay for full bespoke discretionary management.

DFM firms have scrambled to make model portfolios available to advisers on platforms, with the Novia platform currently listing portfolios from 44 discretionary managers, while Defaqto analyses and rates many more model portfolio services.

Model portfolios and fund of funds have been pitched as opposing choices, but discretionary managers are increasingly launching unitised versions of these portfolios in order to offer an alternative for advisers that do not want to use model portfolios.