Models rule shrink-wrapped world

We suddenly live in a world of tick lists, process and tools and with advisers using model portfolios for 41 per cent of customers, just who is picking the funds these days?


One of the most interesting by-products of the convergence of the RDR, digital devel-opments and an increasingly rigorous regulatory environment is the change for fund managers and their product suites.

A world of tools and process

Suddenly we all live in a world of tools, of tick lists and of process. How many times have I heard the words “robust repeatable processes”.  Risk-profiling tools rule the roost and many fund managers grumble that the risk tail is wagging the investments dog. There is an inherent tension between running a compliant business, with method and an audit trail – and that sprinkling of fairy dust which talks to the individual client suitability requirements and produces a solution which is truly fit for purpose.

The use of centralised investment propositions (Cips) is on the up. We have been tracking this with advisers for the past eight quarters. Over the past four quarters, advisers have told us they use model portfolios for 41 per cent of clients. Approximately half will run these models in-house and half will outsource. So the influencers are research houses or those who build models. The combined OBSR/Morningstar machine is a powerful force.

The widespread use of models is relatively new, facilitated by platforms which gave advisers the tools for bulk switching and rebalancing. It is very difficult to know – in a £ sense – how much money is going into models. Why did adviser A choose that M&G fund. Did HE choose it? Or did a third-party make that decision for him?


Who is picking the funds these days?

We suspect that fund managers are – unlike advisers and platforms – still largely clinging to how they have done business in the past. In a world of Cips, what is the new role of a retail sales team for a fund manager?

This means that sales and marketing campaigns can be fundamentally misaligned. More and more advisers we interview
tell us that the fund selection piece is not up to them anymore.  So in a world of Cips,
what is the new role of a retail sales team
for a fund manager?

(This is just one of the questions under scrutiny. Word is the regulator is starting to increase its focus on fund managers and the visits are not particularly pleasant.)

Although we have no empirical evidence for how many decisions are influenced by model portfolios, we can see, for example, there were £10bn of gross sales on platforms in the fourth quarter of 2012.

Advisers are using models for 41 per cent of customers and, as new kids on the block, gross sales are more relevant to model portfolio sales than net sales. That legacy business transitioned onto platform; that old pension vehicle brought into the 21st century; the inherited client brought into line with the adviser firm’s modus operandi – this transitioned new business, these gross platform sales, are dripping into models. 

We are gathering more data about the £ worth of this 41 per cent but 41 per cent of £10bn is a big chunk of money. Where the decisions have been made by a key and terribly finite group of research houses and model portfolio providers.

Advisers: Are there any key groups you might turn to before making investment decisions?
Online data/tools/technology provider 63.50%
Fund ratings agency 61.80%
Discretionary fund manager/investment manager 31.20%
Internal investment panel 30.90%
Your network 22.30%
Trade press titles 20.30%
Question posed to advisers in a Platforum survey
Source: Platforum


Horses for courses

I have talked about models in this article. Multi-manager and discretionary fund managers (DFMs) also make up the Cip arsenal. Our research identifies that many advisers will segment their customer base – and investment solution – based on the £ value of the portfolio.

As the chart shows, DFMs are clearly a solution assessed principally for those clients with more than £500,000. Multi-manager is prevalent among those clients in the £50,000 bracket. 


Looking forward

Fast forward and it takes little stretch of the imagination to see a world dominated by fewer, bigger brands, a world of solutions, a world with more passives and a few spicy +4 per cent alpha condiments on the side.

Although the focus of most fund manager discussions has been on fees and rebates, we think that a bigger challenge and hurdle is to re-align a business to a world dominated by solutions as well as building blocks – and a world where the sphere of influence is being acutely shrink-wrapped.

What client segments (by £ figures) do you manage the following investment strategies?
  Fund picker (%) Multi Manager (%) DFM (%) Model Portfolio (%) DIFs (%)
£50k 25 45 3 26 1
£50k – 100k 33 26 5 35 1
29 29 20 17 31 2
£500k – 1M 26 13 27 32 2
£1M+ 26 16 25 30 3
Question posed to advisers in a Platforum survey
Source: Platforum


Holly Mackay, is managing director of The Platforum. The Platforum is currently researching Stickman II – a project which tracks the shrinking sphere of influence, identifies and interviews the key influencers and assesses what this means for fund managers.