The structure and marketing of model portfolio services (MPS) risks misleading investors, according to the Financial Conduct Authority’s (FCA) study of the platform market, released this morning (16 July).
The 110-page FCA Investment Platforms Market Study interim report stated similar risk labels were applied to very different portfolios and customers may have the wrong idea about the likely risk/returns they face.
The FCA found the information that platforms provide about these model portfolios made comparison difficult, and similar sounding labels (for example, 'cautious', 'conservative', 'balanced') were found to expose investors to significantly different underlying assets and volatility in returns.
According to the regulator's study around 17 per cent of non-advised consumers use the ready-made portfolios their platforms offer.
These consumers were found by the FCA to tend to be the less active platform users, younger and less affluent investors.
Platforms, alongside wealth and asset managers, are increasingly offering their own multi-asset and multi-manager funds and model portfolios to cater for this group of consumers, the regulator stated, so there has been steady growth in the model portfolios offered by platforms, with in-house model portfolios investments increasing from £5bn in 2011 to £38bn in 2017.
Paul Stocks, investment director at the firm of Dobson and Hodge in Doncaster, said he tended not to use model portfolio services for clients because he feels that classifications such as “cautious” are too general to meet individual client needs.
The regulator also expressed concern about the vastly differing level of fees offered by model portfolio service providers, and said those products with higher fees tend to deliver lower returns than those with lower fees.
The FCA also warned about the consequences of investors having large cash balances on their accounts, and thereby missing out on either investment returns if the cash was re-deployed into the market, or interest if the cash was placed in a bank account.
Consumers using direct to consumer platforms were found hold large cash balances.
In 2017 they held £16bn in cash, amounting to 8.8 per cent of assets under administration compared to 3.9 per cent of AUA on adviser platforms.
Even where consumers make a conscious choice to hold cash, the FCA stated they may not realise the cost of doing so through platform fees charged on their cash balance, potential lost investment returns, or potential foregone interest.
The regulator said it will introduce measures requiring that clients be alerted when they have built up substantial cash balances.
Final rules are set to be published in the first quarter of next year.