What does your Centralised Investment Proposition (CIP) look like? Following the introduction of the PROD regulations in January 2018, many advisers reviewed their client segmentation and then ensured that appropriate products and services were being delivered to their client groups. This included investment solutions.
A CIP should be broad and flexible offering a range of investment options for each segment. In a previous life, when I helped advisers to define their CIP, segmentation was often based on client assets with the higher net worth clients being offered a DFM Portfolio, mid-range clients a model portfolio solution and lower value clients a multi-asset fund.
PROD has led many advisers to implement more sophisticated segmentation with lifestages now more prevalent and investment solutions often including active, passive, blended options and the ability to meet clients’ ESG preferences. But what about the wrapper? Why would some clients be invested in a fund with others directed to a model portfolio? When might a financial adviser chose one over the other?
Consider some key differences:
Costs: There is an urban myth that model portfolios are more expensive than funds due to the DFM charge.
However, management charges also apply within a fund so it’s important to look at the total cost of ownership to the client. The removal of VAT for many MPS solutions is also now making them more cost competitive.
Trading charges: When any listed investments are held within a model, these are subject to dealing charges by the platform. These can vary significantly depending on how these are charged and could be a challenge for smaller investments or regular contributions where charges eat into the investment. A fund might be a better option in some circumstances.
Availability: Both funds and models are available on platforms but the distribution agreements required are different and it can often be easier to make a fund rather than a model portfolio solution available.
Platform technology sometimes restricts the holding of some investments within a model portfolio (e.g. investment trusts, ETFs). This limitation would not apply within a fund structure thereby potentially giving access to a broader range of investment opportunities for investors.
Reporting: One of the benefits of a model portfolio is that all the holdings can be viewed and reported on by the platform. Often described as ‘look through’, the client can see all the underlying investments and have comfort that they are fully diversified. This is often cited as one of the main challenges of a fund. Whilst multi-asset funds also include a broad range of holdings, platform reporting often does not show this adequately however, some asset managers are now turning to technology solutions to deliver better quality reporting and ‘look through’ for multi-asset funds.
Tax efficiency: When investing in a model portfolio, the investments are directly held by the client, therefore any changes made by the manager could be subject to Capital Gains Tax unless the model is held within a tax efficient wrapper (e.g. Pension, ISA). Any clients who have fully funded their pension and ISA allowances may incur CGT when holding the model in a General Investment Account and due to the discretionary nature of the portfolio, potential CGT is outside the control of the financial adviser.