MPS is growing faster than the platform market and costs for clients are falling, according to a report by NextWealth.
The report, titled MPS Proposition Comparison, revealed assets in discretionary MPS grew 12 per cent in the year to September 30, 2023.
This is compared to a 9 per cent growth rate for adviser platforms over the same period.
Heather Hopkins, managing director of NextWealth, said: “This increase suggests that while the overall market pie expanded by 9 per cent, discretionary MPS has managed to secure a larger slice, outperforming the broader adviser platform market.
“It highlights that discretionary MPS remains a strategic growth driver within the wealth management sector.”
Costs and charges continue to fall
As part of the research, pricing analysis was conducted across 313 portfolios from DFMs.
The average price paid by end clients of MPS fell to 0.60 per cent, down from 0.67 per cent 2022 and 1 per cent in 2021.
Hopkins said: “We’re seeing some big savings for clients.
“They now pay an average of 0.40 per cent less on an asset-weighted basis for discretionary MPS than they did in 2021.
“DFMs that charge less are growing assets more rapidly, a similar trend to last year.”
She explained that firms charging a combined MPS fee and OCF of less than 0.80 per cent grew by an average of 8 per cent in the year to Q3 2023.
“This compares to negative growth for those charging 0.80 per cent to 1 per cent and 1 per cent growth for those with charges over 1 per cent,” she added.
The report finds that the average OCF has fallen by 35 bps in the past three years to 40bps (on an asset-weighted basis).
Some firms are using a fettered fund range or an allocation to in-house products to bring down fund charges.
“Surprisingly, we did not see a shift away from active funds this year,” Hopkins said.
“There has been a 1.9 per cent increase in allocation to active.”
Adviser shift
The report interviewed 28 representatives of DFMs operating MPS on platforms and surveyed 244 financial advice professionals in July and August 2023.
There was also a survey of 40 financial advice professionals in October 2023 on compliance frameworks underpinning discretionary MPS.
It found that 41 per cent of financial advice professionals use discretionary MPS and 24 per cent expect to increase use in the next 12 months.
Meanwhile, advised clients hold an average of 8 per cent of assets in cash.
Advisers use several investment strategies but the most popular combination is discretionary MPS and multi-asset/multi-manager.
The report found that firms are reducing the range of solutions used and this is a trend that has accelerated with the consumer duty and the need for consistent outcomes and increased use of client segmentation.
NextWealth said due diligence requirements are forcing firms to reduce the number of partners they work with and solutions they recommend.
Additionally, growth in discretionary MPS continues to come at the cost of ‘build your own portfolios’ and single strategy funds, it explained.
Some 21 per cent of financial advice firms said they are moving away from ‘build your own portfolios.’
Although the market size has grown, the number of DFMs that advisers work with continues to fall and this trend has accelerated with consumer duty.
Advisers work with an average of 1.7 DFMs, down from 2.2 last year.
Hopkins said: “This year’s report highlights the competitive nature of investment solutions, with MPS providing an increasingly attractive route for the advice profession.
“Financial advice firms are experiencing some significant challenges with an onslaught of more regulatory change expected.
“Our report provides insights for both the investment and advice sectors to help them better understand the UK discretionary MPS market, including for strategic planning, market assessments, board reports and broader general research purposes.”
Market dynamics impacting MPS
The report also looked at a range of issues affecting MPS.
One of these is the trend to outsource accelerating meaning younger planners are more likely to outsource.
Other factors include mergers and acquisitions in financial advice businesses with a greater focus on ‘consolidation’ of those businesses post-sale, as well as the cost of risk ratings and portfolio mapping which is a key challenge for DFMs.
Regulatory change is another factor as well as investment performance as most DFMs have struggled to deliver strong returns, which in turn affects flows.
Additionally, NextWealth said capital gains tax allowance changes may also encourage greater use of multi-asset funds, in particular for assets in a GIA.
sonia.rach@ft.com
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