Model Portfolio Service – the cost of delivery for advice firms

by | Jun 8, 2020

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In its 2017 Asset Management Market Study (AMMS) the FCA drew attention to “weak price competition leading to sustained high profits over a number of years.” The finger had been firmly pointed at the industry.

Subsequently, in its 2019 Global Wealth Management Report, EY warned that “firms must recalibrate their pricing models and do a better job of communicating value to clients.” The findings were startling:

  • Nearly half of discretionary clients are dissatisfied with the fees they are paying
  • There is growing concern among clients that fees based on assets under management (AUM) are unfair
  • Only 7% of discretionary clients expect their fees to reduce in future

Value is not just about cost, but cost is clearly fundamental. Investment performance against objectives is notoriously unpredictable, and so cost and service are among the few things an adviser can control for clients with any degree of certainty.

The good news is that the industry’s value proposition is beginning to shift at last. Everybody is now under the value spotlight.

When looking for opportunities to lower the cost of the advice process, top of the list for me must be the provision of model portfolios. I should declare my hand here since I have been taken on by Sparrows Capital to deliver a price disruptive model portfolio service (MPS). We launched our proposition, SCore MPS, on 20/02/2020, the day the Bank of England released the new £20 note. The relevance of all the twenties will soon become clear.

Model portfolios are a very efficient way of delivering a diversified portfolio mix for every type of client attitude to risk (ATR) outcome. They come in many guises and span active management, index tracking and combinations of the two. Model portfolios are effectively “oven ready” and are easy to access via investment platforms. The level of ongoing activity depends on strategy, fund performance and rebalancing policy.

It is completely inappropriate for managers to charge asset-based fees for a service that is constant in terms of workload and which does not scale with AUM. Asset-based fees for MPS disproportionately penalize the very clients advisers value the most, namely those with above average wealth. It is these clients who are beginning to realise, post MiFID II, that they have been subsidizing smaller sub-optimal clients through an inequitable fee structure.

Research conducted recently by the lang cat for Sparrows Capital among adviser firms revealed that:

  • Over 80% of respondents support the concept of a fixed or capped fee structure for model portfolios
  • Of those who expressed a preference, 73% preferred a capped arrangement with an asset-based charge for smaller portfolios and a monthly cap befitting larger clients
  • When offered a monthly price cap range between £10 and £50, 66% of respondents suggested a level between £20 and £30
  • 88% of respondents said they would consider reviewing their existing central investment proposition (CIP) arrangements in favour of a capped fee alternative.

Advisers and their clients clearly value the predictability, transparency and simplicity that a low-cost capped fee structure provides.

On the basis of this research, Sparrows Capital launched its SCore MPS with a price point of 0.1% pa capped at £20 per client per month. We have espoused an evidence-based investment approach since 2008 and this is reflected in our offering.

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