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Are managed portfolio services the answer for IFAs?

Compliance consultant Tony Catt shares his latest thinking on Managed Portfolio Services and why he believes they represent a win-win for both advisers and clients alike.

As you might already know, over the past two years I have completed Managed Portfolio Services (MPS) reports in some detail, which have proved popular with IFA Magazine readers. I will also be embarking on my 2022 MPS research later in the summer this year as MPS is clearly an important part of so many advisers’ client proposition.

As part of this MPS research process, I find that speaking to different fund managers is always interesting. Just over two years ago, Coronavirus had reared its ugly head. The markets were spooked and all funds, without exception, saw their values hit hard as the uncertainty hit prices of stocks and bonds around the globe. At that time, I was taking graphs from Defaqto as part of my research which all looked the same: an incline showing steady growth followed by a dramatic drop.

All together now

The fund managers did not share my amusement that they had all experienced the same graphically illustrated drop. Particularly, when they are so careful to set out their credentials of being original and innovative in their investment strategies. The initial market response to the Covid pandemic meant that fund managers all experienced my favourite investment risk warning that “funds can fall as well as plummet”.

Obviously, the wise money simply stayed in the market to await recovery, which happened reasonably quickly. Although I am aware of one adviser firm that moved all their clients into cash, crystalising losses and thereby missing the recovery. They probably were not the only ones. However, it really does prove the value to advisers and their clients of having efficient and effective portfolio management processes in place to avoid such knee-jerk reactions. You can then ensure that your clients’ portfolios are optimised for consistent, long-term, risk managed returns through the inevitable market ups and downs – whilst keeping the compliance team happy too.

The importance of ongoing management

Defaqto has adopted managed portfolio services (MPS) as the preferred terminology for a portfolio of segregated holdings where all clients in a particular profile receive exactly the same portfolios and, crucially, are traded and adjusted, with a discretionary agreement in place, by the discretionary managers.

More Discretionary Fund Managers (DFMs) are offering the MPS style of investments because it enables them to extend their services to smaller investors in an efficient and economical way. This has aligned, quite nicely, to adviser firms wanting to de-risk their investment services by contracting this out to an expert third-party to provide this service.

I find it quite interesting that some IFA firms still believe they can carry out the role of investment manager as well as adviser. However, it must be said that most are now recognising their own limitations and where their expertise really lies – which is in client service rather than investment picking.

The drive to ESG

More recently, the fashion for Environmental, Social & Governance (ESG) style investment has caused a bit of a shake up for the DFMs and MPS business. Many fund managers have embraced Sustainable or Responsible styles of investment for some time. But the number of ESG funds has mushroomed over the last couple of years as fund managers all want a slice of that business seemingly suffering from a bout of collective FOMO (Fear Of Missing Out).

There are anecdotes about the number of funds that have been re-labelled as ESG funds without any change to their investment mandate. This so called ‘greenwashing’ can be very confusing for advisers and clients who are trying to make sense of the information and data they receive.

Also, the people who have been operating in this particular field of investment for years are likely to argue that those fund managers which have simply introduced an ESG labelled fund have missed the point of ESG investment. ESG investment is not just a badge, but a philosophy and an investment strategy that should be the beating heart of a company’s investment beliefs.

One fund manager described ESG investment as doing the investment job properly. So, any fund manager that runs both ESG and traditional funds is basically admitting that their traditional funds are not doing the whole job. In such instances, you have the choice of a full-blooded investment and a half-hearted one.

Task force on climate-related financial disclosure (TCFD)

The TCFD was set up by the Financial Stability Board in 2015 to identify the market’s climate-related information needs and develop a set of climate-related disclosure recommendations.

The TCFD’s final report, published in June 2017, sets out 11 recommended disclosures under 4 pillars:

  • governance
  • strategy
  • risk management
  • metrics and targets

The Government endorsed the TCFD’s recommendations in 2017 and made their implementation a central part of the 2019 Green Finance Strategy.

In November 2020, a cross-Whitehall and regulator taskforce (including the FCA) published an Interim Report and Roadmap, setting out a strategy towards mandatory TCFD-aligned disclosures by 2025. In November 2020, a cross-Whitehall and regulator taskforce published an Interim Report and Roadmap, setting an indicative timeline for when commercial companies and financial services firms should expect to begin reporting against the TCFD’s recommendations.

As of the end of December 2021, the following regulated firms have climate-related disclosure requirements aligned with the TCFD’s recommendations:

  • premium listed companies
  • issuers of standard listed shares and global depositary receipts (GDRs)
  • asset managers
  • life insurers
  • FCA-regulated pension providers

This disclosure regime is due to be brought in for advisers and the FCA is still working on the timescales for this to happen. Probably not this year, but definitely by 2025 as above.

Before I sign off, I was excited to hear that ESG Accord is about to publish a report on MPS within the ESG environment. I believe that this will be available very soon. I am sure that it will be a great quality production and very useful for advisers.


Tony Catt, Compliance Consultant, 07899 847338

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