Capital gains tax and income payments
The main difference here is around capital gains tax.
A fund-based solution will roll up any CGT liability until assets are sold, whereas a managed portfolio service will use an individual’s allowance on an ongoing basis.
A managed portfolio service will allow investors to take fixed monthly income payments or the natural yield, whereas a fund solution will only allow natural yield to be paid out, unless the investor sells units.
Service and regulation
Buying a fund has often been a way for advisers to retain control of the fund picking, while ultimately outsourcing the day-to-day investment responsibilities.
With a managed portfolio service offered by a DFM, advisers can often service the needs of a broader range of clients, because DFMs can typically offer more investment solutions (such as alternative investment, responsible investment and bespoke investment) than are available through advisers using fund-based solutions.
A professional adviser plays a key role in determining which option is most suitable for an individual investor and in finding a suitable service provider, be that the manager of a multi-asset fund, or a managed portfolio service.
As discussed above, depending on the investor’s portfolio size, reporting preferences and tax situation, one option may be more practical than the other.
Ultimately, it comes down to investor preference, and both options can play a part in helping clients meet their end objectives, particularly as clients’ investment requirements and circumstances change over their lifetimes.
As a DFM, it is up to us to offer both service options to advisers to allow them to make the best choice on behalf of their clients.
Jonathan Webster-Smith is head of multi-asset investing at Brooks Macdonald