A fund alternative to model portfolios

A fund alternative to model portfolios

While model portfolios remain popular with advisers there are signs that this enthusiasm may be beginning to wane. 

In interviews with advisers last year, Aegon UK found that 36 per cent mainly use model portfolios with their clients, which is down from the 41 per cent in 2016, according to a Platforum survey. This is at least partly due to the administrative burden and governance responsibilities associated with individual portfolios, according to the research. 

The Aegon UK survey also found a sharp increase in the number of advisers using a single, either internal or external multi-asset fund for clients, up from 18 per cent in 2016 to 36 per cent in 2017.

The fund approach can have positives for clients, including tax advantages and greater transparency, together with a more efficient operation and reduced administrative workload for the adviser. Importantly, advisers and wealth managers can use a fund structure, without necessarily moving their client money into an ‘off-the-shelf’ vehicle operated by a third party fund group.

Legal responsibility

For many businesses, unitising segregated client portfolios into their own open-ended investment company (Oeic) fund structure is now a perfectly viable option. 

Existing investment management arrangements can remain in place and an independent specialist can be appointed as the authorised corporate director (ACD), with regulatory and legal responsibility for the fund and its governance.  

The prospect of advisers moving client money into their own funds will, at a superficial reading, cause wariness among some, still mindful of past negative connotations around ‘broker funds’ and their multiple tiers of charges, eroding client returns. The unitised portfolio of today is a very different beast though. The costs of operating a fund and having it hosted on a full-service online platform now need be no more than those associated with running segregated portfolios.

Another key concern is that moving to a unitised structure means clients lose the transparency of having their own portfolio and will perceive this as a reduced quality of service. Latest platform technology can address this to a large degree, providing a ‘look-through’ capability, so that when a client looks at their portfolio they see through to the individual stock holdings, rather than just units in a fund.

Key questions

Unitisation will not be the answer for everyone, however, and there are a number of key questions a business will need to address to help decide whether this is the right path. The first step is to weigh up the advantages and make certain it is the most suitable option for clients. Part of this process is to consider the existing alternatives, such as external multi-asset portfolios, that are already available.

A sensible next step is to look at the value of client assets that would move into the fund. There are fixed or minimum costs that come with running a fund, such as depositary and auditor’s fees. Some £150m is seen as the minimum needed to make an Oeic economically viable.