Partner Content by 7IM

The myth of “cost-free” model portfolios

'Don’t do it yourself'

Sometimes, there are things to do around the house. Whether it’s hanging a picture, fixing the boiler or resealing the bath, I have an overwhelming temptation to give it a go. After all, I’ve got a toolbox, a brain and the internet. Why pay a third party?

The answer – every time, in my case – is because I’m not thinking about the long term. The picture might end up on the wall, but I’ve now got to fill in and paint the holes I’ve made. The bath is watertight, but I’ve spent so much money on tools and materials, I’m out of pocket. A weekend of cold-water showers later, and I’ve still had to call the gas man.

In focussing on avoiding the up-front payment, I’ve ended up spending more time and more money. The hidden costs get me every time, although I’m gradually learning that for me, the best motto is ‘don’t do it yourself’.

Of course, you might be more practical than me (you could hardly be less). But there will always be occasions where it simply isn’t worth doing it yourself; from takeaway dinners to car repairs to all-inclusive holidays, the hidden costs just aren’t worth paying.

DIY models

Over the last decade, more and more advisers have started to run their own model portfolios. Whether that’s blends of multi-asset funds, or risk-targeted index products, or even individual stock portfolios. Paying fees to a third-party model portfolio service (MPS) provider seems needless, for something that it’s perfectly possible to do well in-house.

But during the ten years in which we’ve been offering third-party model portfolio solutions, we’ve noticed that the advisers we work with all have an identical reason for deciding to partner with us: the hidden costs of model portfolios end up being large enough to hurt their business.

The frictions of running model portfolios aren’t obvious, especially at first. But over time, they mount up.

Hidden costs of models

It might be the increasing regulatory reporting burden (which isn’t going to get easier!). Or it might be the challenge of operating across multiple platforms. Or the considerations of investment selection and asset allocation. Or keeping a handle on the underlying performance and risk of each model. Or providing suitable and timely commentary. Or it might be all of these and more.

Quite simply, it ends up being about time. The hidden cost of an internal model portfolio always ends up with an adviser finding less and less space in their day to look after existing clients or to find new ones. Some firms end up having to hire someone to do it for them – the very opposite of cost-free!