Multi-asset fund or Model portfolio?

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.     

This last point and the considerations above simply demonstrate that there is not a one size fits all solution and certainly no right or wrong answer as to whether one option is more beneficial than another. Financial advisers have choice and the decision on which to use is based on client requirements and suitability.  

Author: Gillian Hepburn, Intermediary Solutions Director, Schroders

Visit www.schroders.co.uk/outsourcing to find out more about our investment solutions.

Important information

Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Schroders has expressed its own views and opinions which may change. 

This information is not an offer, solicitation or recommendation to buy or sell any financial instrument or to adopt any investment strategy. Nothing in this material should be construed as advice or a recommendation to buy or sell. Reliance should not be placed on any views or information in the material when taking individual investment and/or strategic decisions. No responsibility can be accepted for error of fact or opinion. Issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU, registered No. 1893220, who is authorised and regulated by the Financial Conduct Authority.