Model portfolios need dissecting

Lorna Blyth, investment marketing manager at Scottish Life, has warned that advisers could suffer the wrath of the regulator if they fail to quiz asset managers about the time horizons for their model portfolios.

While Scottish Life’s Governed range of model portfolio funds were risk targeted for different durations, Ms Blyth said many of the provider’s competitors stated their offerings were low, medium or high risk without explaining what period the investment should be made for.

She said: “At the moment, most providers have some variation of a model portfolio. We have seen them from asset managers and from advisers. Most of them tend to be quite general and some of them are being used for pension money as well as Isa money.

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“I think what we will start to see are model portfolios being designed for specific customers. So, for example, our Governed range is suitable for pension investors who are moving into retirement.

“Last year, we launched model portfolios specifically for customers who were in drawdown.

“It is about providers being clear about the target market that their portfolios might be suitable for. We will start to see a lot more segmentation in the market.”

Ms Blyth also warned advisers during a video interview with FTAdviser that they need to make sure their documentation is comprehensive to ensure they do not fall foul of FCA rules.

Back in 2012 the FSA raised concerns about the processes used by advisers when considering model portfolios and whether clients were being shoehorned into these funds when alternative investment vehicles could be more suitable.

Ms Blyth said: “As with anything, it is about documenting conversations that you have with the client and making sure you have everything on file so when the FCA do come knocking, you can show that a clear process has been followed.”

Adviser view

Patrick Connolly, a certified financial planner for Bath-based Chase de Vere, said time horizons had to be a key consideration for advisers. While portfolio construction for a low-risk 10, 15 or 25-year investment was likely to be very similar, he said, the make up of a low-risk five-year investment should be very different.