A fund alternative to model portfolios

Less than that and the fixed costs would weigh too heavily on performance for individual investors. It is possible that a fund with much lower assets might be viable, but a higher level helps to protect investors’ interests.

The assets in each of the risk-rated portfolios are likely to become sub-funds of the Oeic and here around £25m would be a sensible starting level to make each sub-fund viable. However, if the required assets are not available, sub-funds can be blended to create the appropriate risk-rated options or to increase the range available to clients.

Key Points:

  • As the use of model portfolios tapers, advisers are looking to operating in-house funds for clients
  • In-house funds come with complexities but can offer tax benefits for clients and streamline administration for advisers
  • Operating an in-house fund will not be suitable for all advisers but could be viable for those with over £150m in assets under advice

It is also important to consider what type of assets will be held in client portfolios. There are restrictions on what Ucits funds can hold. They are not, for example, permitted to have direct exposure to property or gold. However, if necessary, a business could consider using a Non-Ucits Retail Scheme (Nurs) structure, which has fewer restrictions.

Some advisers will have highly bespoke client portfolios that might include items not eligible for a fund structure. In other cases, clients may hold shares in a company with which they have a specific connection. These may also not be suitable for an Oeic structure. However, there is the option of clients holding them separately, alongside their unitised portfolio.

If, after the adviser has addressed questions like this, unitisation still appears a sensible approach then the advantages for clients and the business can be significant.

Client benefits

When segregated portfolios are rebalanced, the sale of assets can trigger a capital gains tax (CGT) event. This is not the case within a fund, where transactions are sheltered from CGT. The liability is only triggered when the client sells their overall investment. This reduces the tax-reporting burden for the client (and indeed the business), while also allowing for more effective tax planning. Another cost benefit for clients is that investment management fees are free from VAT, unlike those on segregated portfolios.

Furthermore, clients have the reassurance that comes from the degree of regulation associated with funds and the governance that a good ACD will provide. They also have the benefit of transparent, published performance figures for the fund.

Advantages for the business

For the business, unitising portfolios enables a move away from higher individual transaction costs and restrictive investment strategies. It means rebalancing an entire sub-fund, rather than a multitude of individual portfolios; simplified reporting; and increased distribution opportunities.

The process of unitising portfolios can appear complex, but there are a number of specialist host ACD businesses to provide guidance at every step of the process, from the FCA application right through to producing all the literature required by the regulator, such as the fund’s prospectus and key investor information document (Kiid).