Do platforms justify extra layer of costs?

The CIP is described by the FCA as “a standardised approach to investment advice”.

As part of this drive to develop a holistic investment advice strategy, there has been an increase in the number of advisers putting clients’ money into model portfolios on platforms set up by discretionary fund managers (DFMs).

DFM models tend to be risk-rated ranges of portfolios that generally invest in between 15 to 20 funds across a range of asset classes.

Heather Hopkins, research director at Platforum, says outsourcing client money in this way is popular as it “gives advisers more control over client assets, and in particular makes it much easier for the adviser to fire the DFM”.

Wraps such as Novia and Ascentric were early adopters of the idea of providing DFM portfolios on their platforms, and remain among the favourites.

However, Standard Life recently announced it had reached £1bn in assets on its Investment Hub, a collection of DFM models that only launched last year, which shows the growing popularity of the service.

Clive Waller, managing director of CWC Research, says it is difficult to get definitive numbers on the proportion of advisers outsourcing to DFMs, but from his research he found around three-quarters of advisers with a CIP use model portfolios in some way.

Of these advisers, 20 per cent say they use an external provider, which mostly means using DFMs.

Mr Waller said of those advisers that use DFM models on platforms, performance was cited as the most important criteria for picking a provider – even though Mr Waller points out there is no way to easily compare performance – followed by service and then cost.

But many advisers still oppose the idea of using DFM model portfolios on platforms – even those who do outsource some of their clients’ money direct to discretionary managers.

Peter Matthew, managing director of Jacksons Wealth Management, says: “If you’re going to use a DFM, why not go direct and cut out the platform charges?

“They seem to be a kind of cut down version of what the DFM would do on their own systems, because the platforms being used don’t give access to all the institutional-level stuff the DFM might normally use. So you get inferior portfolios at higher cost.”

Aj Somal, chartered financial planner at Aurora Financial Planning, echoes the concerns on fees, adding that “it is very difficult to find out the true total cost of these portfolios”.

Matthew Jeynes is a freelance journalist

CENTRALISED INVESTMENT PROPOSITIONS EXPLAINED

What are they?

In its finalised guidance on assessing suitability the FCA said: “We use the term CIP to reflect a standardised approach to providing investment advice.” Examples of this include:

• Portfolio advice services – recommending a portfolio designed to meet a target asset allocation. Firms may operate a number of these ‘model portfolios’ to meet the needs and objectives of clients with different risk profiles.

• Discretionary investment management – either in-house or referred to a third party where the adviser has some say in the investment strategy adopted.

• Distributor-influenced funds (DIFs)

The regulator’s view

In its finalised guidance, the FCA said that while there were benefits to using centralised investment propositions, there were also some drawbacks.

It noted: “We recognise there can be benefits to offering a CIP for both clients and firms. Clients can benefit from more structured and better researched investments, and firms can benefit from efficiencies in the management of risks associated with investment selection. However, we have concerns that a CIP may [sometimes] be unsuitable for a retail investor.

For example:

• ‘Shoehorning’ – firms might recommend a ‘one size fits all’ solution that is not suitable for the individual needs and objectives of a client;

• Churning – firms might advise clients to switch their existing investments into a CIP without adequate consideration of whether the switch is both suitable and in the client’s best interest;

• Additional costs – the use of a CIP might result in higher (and potentially less transparent) charges than the client’s existing investments, and with few additional benefits.

PLATFORMS AND DFMs

In a recent newsletter, the Platforum’s Heather Hopkins suggested the trend for outsourcing on platforms may have peaked.

She explained: “Advisers tell us that some 40 per cent of their assets are outsourced (to model portfolios or bespoke fund picking), a figure that we believe has plateaued.

“Since the RDR we have seen a steady and strong trend to outsourcing fund selection, but those relationships are established now and we are no longer seeing a trend to outsource ever more assets.

“We’ve also seen a shift to model portfolios from bespoke fund-picking, particularly in the past year. Bespoke fund-picking is still de rigueur for a certain slice of the top end, but model portfolios are generally much cheaper and now account for 46 per cent of adviser assets, and can be accessed from as little as £10,000.”