Discretionary Management  

What is behind the evolution of managed portfolio services?

  • List what MPS is and what have been the main drivers of the evolution of MPS.
  • Describe what impact the platform approach has had and increased transparency.
  • Identify how MPS solutions might develop and what impact new entrants will have.
CPD
Approx.30min

The biggest hurdle

Perhaps one of the most notable developments on the evolution journey concerns the custody of client assets.

Perhaps as recently as six or seven years ago, DFMs appeared very reluctant to hand over formal custody of client assets to adviser platforms, preferring to keep control in-house, and as a result many DFMs were slow adopters of the MPS on platform business model. In a similar vein, advisers were equally concerned over losing their clients to a third party DFM.

The run-up to the RDR (Retail Distribution Review) in 2013 prompted advisers to review their businesses from top to bottom and this included a serious examination of how, and who by, client assets were managed.

This, together with the proliferation of platforms capable of hosting MPS solutions, proved to be a major catalyst. MPS, and in particular MPS on platform, gained serious traction in the market at this point. 

The rise of the platforms

The platform approach ensures that the client relationship remains with the adviser and not the DFM.

In most cases the DFM will not even know who the client is. With the day-to-day running of the client money in the hands of the DFM, the adviser is free to spend more time focusing on the client, while maintaining responsibility for the suitability and due diligence, all the while keeping sight of the assets.

While touching on platforms, a quick glance at Defaqto’s Engage data reveals that the average number of platform partners for a DFM MPS stands at seven. However, some MPS solutions are available on as many as 18 third party platforms. We can only see this accessibility widening further.

As evidenced in chart 1, the ‘evolution’ of MPS has largely taken place on platform with considerably stronger growth here than in their direct custody counterparts.

With the vast majority of MPS portfolios consisting of unit trusts/Oeics and exchange-traded funds (ETFs), DFMs have been able to on-board their direct custody offering onto platforms without too much tinkering to existing portfolio models, while other DFMs have simply developed their proposition to include a platform version. 

However, do not assume that a platform version of a direct portfolio is the same. There may be different underlying holdings and there will certainly be a different charging structure.

With platform investment minimums starting from as low as £1,000, this has given advisers and their clients unprecedented access to discretionary solutions previously out of reach. 

Transparency is the key

Fast forward a couple of years and we are in the age of transparency.