He says: “The removal of VAT for many model portfolios also makes them more cost competitive. Advisers that were principally multi-asset fund supporters have begun to support the use of model portfolios. This has been driven by greater segmentation of clients within advice firms as well as a greater willingness among investors to understand the value of ongoing advice fees.
“Model portfolios are particularly useful for drawdown clients since a cash MPS can be used to target short-term cash flow needs, while a more diversified equity MPS can be used to target longer-term growth.”
Advisers who do not want in-house CIPs often opt to use outsourced multi-asset solutions or discretionary fund managers.
Multi-asset funds generally cover different geographical markets and include a wide array of asset classes and are managed by professional fund managers.
There are many benefits of using portfolios on a discretionary basis.
These will often have a broad range of styles, from actively managed to tracker models.
The purchasing power of a DFM often means improved fund share-class availability, including institutional funds.
Some fund houses will offer rebates, which are then passed back onto the investor.
Andy Miller, lead investment director at Quilter, says: “One of the biggest industry changes we have seen in the past decade is the enormous move towards discretionary models as opposed to advisory; either through outsourcing investments to a discretionary manager, or alternatively advisers taking on discretionary permissions themselves.
"There are twin drivers here: consolidation and regulation."
Miller adds: “Creating, monitoring and administering investment portfolios requires a huge amount of time and research. Furthermore, advisory models can be very inefficient, as advisers have to write to every client and get their agreement before implementing any changes to the investment proposition.
"The consolidation we have seen within the industry means that some firms are now large enough to have the necessary investment and administrative capabilities to run model portfolios, but due to the inherent inefficiencies of advisory models they have tended to move towards running portfolios on a discretionary basis.
"For those firms that wish to pursue this route this does mean greater regulatory scrutiny, and higher costs, so regardless of scale, it isn’t right for all advice businesses.
"From a regulatory perspective, the compliance headache running in-house advisory models can bring has seen a drive from financial advisers to focus on where their expertise lies."
Miller says that how IFAs outsource and monitor CIPs can be done in a variety of ways. They can use a discretionary MPS, or a panel of model portfolios, so they have off-the-shelf investment solutions available for clients across a range of risk levels and investment styles.
