As the volume of assets held through platforms has increased dramatically over the past few years, so the number of model portfolios has grown.
Using a discretionary fund manager (DFM) to run model portfolios on a platform is, on the face of it, an ideal solution.
The adviser does not need to research the individual funds, the process is streamlined by removing the need to contact the client every time a switch is made, the portfolios can be automatically rebalanced to a set asset allocation, the adviser feels under control because the assets are held in custody by the platform and the cost of investment management appears to be reduced. In addition, the adviser with a portfolio on a platform managed by a discretionary manager has an excellent context against which to showcase the reporting tools that platforms provide.
Similar benefits to a discretionary platform portfolio can be achieved through investment in a multi-asset fund or a “unitised DFM” offer as described by Defaqto in its Unitised DFM study. So, for an adviser wishing to access discretionary investment management through a platform, which is the better solution – a model portfolio or a multi-asset fund? The differences between the solutions are:
The range of underlying assets
Portfolios managed by DFMs on platforms tend to utilise either Oeic funds or exchange traded funds (ETFs). In theory, it is possible for a DFM to use investment trusts and direct equities in platform portfolios, however, these can create compliance difficulties for the DFM.
It is probable that the DFM seeking to access a specialist asset class may utilise one of a limited number of investment trusts across all investors for whom it is appropriate. The investment may be bought by the DFM into a range of investment solutions including multi-asset Oeic funds, discretionary portfolios run by the DFM and a portfolio on a platform.
The difficulty is that the DFM cannot control the dealing process for the platform portfolio. For most of its clients, the DFM will deal direct through brokers. For investors through the platform, however, the deals have to be routed through the platform, which generally operates more slowly. This creates a significant treating customers fairly (TCF) issue for the DFM – how can a situation be tolerated in which one segment of a DFM’s clients is always dealing behind the rest of the client base? This problem does not exist if investment is made through a multi-asset fund. In addition, the DFM is able to use the full range of assets that can be deployed within a fund including direct investments and hedging where appropriate.
Cost
In model portfolios it is often the case that the cost of the DFM managing the portfolio will be lower than would be the case in a fund or an individual discretionary portfolio. However, with the limited range of underlying assets held in platform portfolios, it also means that many of the lower cost assets cannot be included.
Consider a situation in which a client with £250,000 has gone through a risk profiling process with an adviser and has agreed that a portfolio managed to Distribution Technology’s Dynamic Planner Risk Profile 6 would be the most appropriate. The table [see below] compares the cost of such a portfolio using a model portfolio on a platform (investing in only Oeic funds or ETFs) with that of a multi-asset fund that is actively managed to remain below the client’s risk limit, and uses a mixture of asset classes.
The model portfolio incurs much higher investment costs as it invests a higher percentage in Oeic funds, but the multi-asset fund incurs fund charges. However, the model portfolios can incur higher platform charges, as they require the functionality of a more sophisticated platform than does the purchase of the fund.
Performance reporting
A benefit of a multi-asset fund is that reporting is controlled and governed by set reporting rules making it easier for both client and adviser to assess and compare performance. So, accessing discretionary management through a risk-managed multi-asset fund solution via a platform can offer a broader range of underlying investments at costs that are similar to, or lower than a model portfolio run by a DFM on a platform.
The decision comes down to whether the additional functionality provided in a more sophisticated platform is worth the extra cost to the client while having more constrained investment options, or whether a broader range of underlying assets at a lower cost is more attractive.
John Jackson is managing director, intermediary business at Cornelian Asset Managers
| Model platform portfolio (%) | Multi-asset fund or unitised DFM (%) | |
| Annual management charge (clean share class) | 0.75 | |
| Investment management fee (inc VAT) | 0.36 | |
| Synthetic costs (investment charges of funds used in portfolios) | 0.77* | 0.37** |
| Other expenses (audit, trustee and depositary, etc) | 0.09** | |
| Total costs before platform charges | 1.13 | 1.21 |
| Platform costs *** | 0.5 | 0.11 |
| Total percentage cost | 1.63 | 1.32 |
Source: Cornelian Asset Managers
Figures are based on Cornelian Discretionary Platform Portfolio 8 on the Novia platform and the CF Cornelian Growth fund, risk profile 6 on Dynamic Planner
*Cornelian internal as at 28.02.14
**CF Cornelian Investment Funds Interim Unaudited report and financial statements 15.10.13
***The Platforum Pricing Guide, October 2013. Platform charges quoted are for Novia for the model portfolio example, Alliance Trust for the multi-asset fund.
