Written by Angus Robb, Investment Account Director at Defaqto
The competitive landscape in the world of outsourced investment solutions is never more fierce than when new investment money is scarce.
The pressure on the new money being made available to asset managers over the past 18 months has been high due to the cost of living crisis, the limitations on investment returns that the war in Ukraine and the post COVID economic climate have applied have further pressured investment flows.
For many years, after the Retail Distribution Review (RDR) in 2012, the discretionary MPS market has struggled to fully replicate the inflows of multi-manager and multi-asset fund ranges. There are a number of reasons for this. Back in 2012, discretionary MPS portfolios were not available via wrap platforms, and the efforts to enable efficient MPS propositions on third party platforms is well documented. There was also a perception that MPS was more expensive, carrying an annual service fee that attracted VAT.
Furthermore, the difference in CGT treatment to funds gave the impression of a product with undesirable tax complications for a retail investor. Changes to VAT treatments and the advent of MIFID II disclosures have done MPS a favour in ensuring like-for-like cost comparisons with funds, and the realisation that the vast majority of MPS assets are wrapped by ISAs and SIPPs has eased concerns with tax complexities, unless it is genuinely of benefit to the client to utilise CGT allowances.
Over the recent past, MPS has started to prove both robust and increasingly popular for advisers. Being cheaper to launch, many MPS ranges now show an attention to detail that can be very expensive for multi-asset fund ranges to replicate. The spate of launches of sustainable MPS solutions, covering most risk profiles, and expressing passive and active options, or different grades of ESG focus are a good example of how MPS can give advisers a very precise choice of portfolio that best fits their individual client and ensures that their advice is leading to the strongest outcomes. From a consumer duty perspective this is crucial, as is the fact that MPS is virtually exclusively available to advisers, and not available via D2C channels as a fund will be.
In this climate where new wealth is scarce, asset managers also need to try to retain those assets they have built up, via successful propositions, in more amenable investment climates. The ‘agent as client’ requisite for most discretionary models on platforms enables MPS managers to have direct contractual relationships with client advisers. This transparency of where asset flows are coming from is not something that fund providers have, and it can allow MPS managers to better protect their assets. Advisers may also feel that they have better access to MPS managers, and can monitor portfolios on behalf of clients, more effectively via an MPS than through Funds.
It is of further interest to see where recent trends in adviser behaviour leaves bespoke discretionary solutions. Defaqto is aware that the average case sizes for clients placed in a bespoke portfolio service have been rising for many years. There are still, without question, a large and growing number of clients that need a bespoke portfolio service. The increasing importance and complexity of strong retirement plans are a good example of this.
Having said that, accumulation phase investment clients with less than £300k portfolios, that do not take advantage of the higher service levels available via bespoke portfolio management may well be paying for service elements and portfolio flexibilities that they do not need or use. The logical home for such clients is the discretionary MPS. It is a given that lower investment returns and the consumer duty will focus all clients on costs, and if advisers do not feel that a bespoke portfolio management fee is benefitting the client, then a discretionary MPS, quite probably with the same asset manager, is a likely alternative.
The growing and competitive appeal of discretionary MPS has not been missed by the marketplace of course. Legal & General Investments, Vanguard, M&G Wealth are three managers that one would associate with incredibly successful multi-asset fund ranges that have also introduced their MPS ranges to the Defaqto advisers using the whole of market Defaqto DFM research and selection tools on Defaqto Engage in the past 18 months.
