Client segmentation – a phenomenon that grew significantly after the Retail Distribution Review caused a sea-change in advice provision and remuneration – is behind a lot of outsourcing.
This means a lot of mid-stream consumers – those with low to middle-sized portfolios by value – are likely to be the bulk of the client bank. But as these clients tend to have less specialised advice needs, the work done to service this segment has become less remunerative.
Rather than ditch these clients as some national adviser firms did after RDR, advisers have tended to look for a managed portfolio service to which it can outsource lower-revenue-generative clients.
Mickey Morrissey, head of distribution for Smith and Williamson, explains: “With advisory firms increasingly segmenting their client banks, intermediaries often use a managed portfolio service (MPS), accessed through an investment platform, for their lower-net worth clients.
“For traditional balanced growth type clients, without any capital gains issues, outsourcing to an investment manager in this way could be ideal.”
He says that by using an MPS for lower-net-worth clients, intermediaries will have more time to spend with their higher-net-worth clients, and those with more complex financial planning requirements.
Not all client business will need to be outsourced and not all clients will want to be outsourced as they have particular investment needs.
Indeed, as Emily Booth, senior investment manager for Parmenion Investment Management, comments: “There is no easy answer to this question as every adviser and every client is different.”
Of those who are happy to have their investment portfolios outsourced to a third party, some may be comfortable with an off-the-shelf solution that suits their basic investment needs, while others – maybe the higher net-worth – want something bespoke to them.
Some investors may want to have more control over investment decisions and be able to make decisions themselves.
Other investors may have had hotch-potch portfolios collated over time on do-it-yourself platforms, such as Hargreaves Lansdown’s Vantage, and now want to have someone else do the monitoring and asset allocation decisions for them.
Peter Mullins, head of business development at European Wealth, opines: “Suitable clients would include those with little time to be involved in the day-to-day management of their investments.
“For example, a DFM may be suitable for those who want to have changes to their portfolios carried out speedily, whether because of a change in economic or market conditions, or indeed because of their own attitude to investment risk and circumstances.”
Mr Morrissey admits: “There is no one-size-fits-all and a range of clients could benefit from using an MPS.”
The question should always be on how suitable that MPS is for an individual client, and whether the DFM running that MPS is a good fit.
Cost can be a consideration, as on top of the financial adviser’s remuneration, the client will also have to pay a fee for the DFM, which may or may not include any trading costs or stamp duty incurred as a result of ongoing portfolio management.