DFMs struggle with platform readiness for model portfolios

Heather Hopkins Platforum

Discretionary fund management model portfolios on platform are a hot topic at the moment, and rightly so. They are a powerful source of growth for platform assets and a route for DFMs to access the wider retail market.

It is early days for model portfolios on platform. The first was launched less than a decade ago and platforms (in particular the former fund supermarkets) weren’t built to manage model portfolios, so there are hefty challenges.

Nevertheless the DFM presence in the adviser market has now reached such a scale and importance that DFMs, advisers, platforms and fund providers need to understand better what is taking place in this part of the investment market.

Platforum recently published a report on the topic, ‘DFM Model Portfolios on Platform’. In the report we have estimated that platform assets under administration in model portfolios remains under 5 per cent of total adviser platform assets under administration (AUA). But the variance is huge. Some platforms claim to have as much as half of their AUA in DFM model portfolios.

Flows are another matter. Over the past few weeks, I have spoken with a number of platform bosses about models on platform and some gush at the new money that is coming from model portfolios.

We expect most of this “new” money is off-platform DFM money being moved on platform. Advisers tell us that they are using model portfolios for a larger share of assets at the expense of bespoke fund picking, multi-manager funds and bespoke DFM.

Money into DFM models is coming from both ends of the spectrum with growth at the expense of multi-managers (typically used for smaller portfolios) and bespoke DFM (typically for portfolios of over £1m).

Multi-managers

Multi-manager funds are criticised for being expensive and many advisers tell us they can’t recommend them to clients because the entire portfolio is reported as a single line item on the statement.

A financial adviser we spoke to in February told us: “I can’t sell the multi-manager solution. Part of the 1 per cent I charge is for providing the client with an investment solution. It is difficult to justify that through one fund. I can’t justify the platform fee for a single investment.”

She lamented that the solution would be an attractive vehicle for the client and likely more tax efficient, but the lack of look-through reporting makes it unattractive.

Bespoke DFM

At the other end of the spectrum, advisers tell us that they are using model portfolios in place of bespoke DFM. Managing client assets via the platform gives the adviser control over the client relationship and keeps the DFM at arm’s length. It also makes it easier to change DFMs if they underperform.

Challenges on platform

Our conversations with DFMs sometimes verged on therapy sessions. DFMs have had varied success in this market, with some rather disappointed while others have clearly been successful. But it’s not just about asset gathering – DFMs lament that platforms are not built to run models. The biggest complaints are around fund choice and rebalancing.

In some cases, limitations in platform offerings and capabilities can lead to differences between a DFM’s model portfolio proposition on- and off-platform. Some DFMs are prepared to sacrifice choice, convenience and client control to gain the benefits of using platforms in the adviser market. Others view models on platform as filling the sales funnel for the bespoke or off-platform offering.

The approaches among the DFMs vary widely as do their interest in the market. Some aim to work with a maximum of two to three platforms while others are happy to work with as many as will bring in assets.

Look under the bonnet

With a proliferation of choice, we recommend that advisers and platforms perform a thorough due diligence on these DFMs to ensure their long-term commitment to models on platform as well as their resource commitment to managing these models. It can be intensive, particularly around rebalancing.

We remain bullish for growth of model portfolio assets on platform. We expect to see increasing flows to these products and increasing resource from platforms to address the challenges they present.

Heather Hopkins is research director at Platforum