In this in-depth Q&A, IFA Magazine talks to Simon Taylor, Head of Strategic Partnerships & Platforms, and Ronelle Hutchinson, Senior Investment Director, at Investec about their successful managed portfolio service on platforms. Simon and Ronelle provide a detailed description of Investec’s goals and objectives for the MPS range – and how it can address the shifts we are currently seeing from advisory to discretionary as well as from accumulation to decumulation phases
IFA Magazine: What is the business focus for Investec on MPS?
ST: I’ll start by reflecting on what’s been happening in the platform space. Platforms were introduced back in 2000 but were really catapulted forward in 2012 following the Retail Distribution Review (RDR). 20+ years on, there are now around £600bn of assets on platforms in the UK – and a handful of platforms dominate the UK market in terms of both assets and flows. If you look at the Fundscape report at the end of 2021, 80% of advised assets were held on just nine platforms – and those same nine platforms captured roughly 72% of net sales in Q4 of 2021. So, platforms have clearly taken off in the UK – and it’s evident that to be successful in the platform space, size matters.
There has been almost an “arms race” in the world of platforms – with functionality, service, security, and pricing determining which ones are the winners. But we believe that further consolidation is likely to take place. We have already started to see some of the smaller platforms merging – for example, with Novia and Wealthtime unifying, and Morningstar acquiring Praemium – and we expect this to continue.
The analogy I like to use is: 25 years ago, there were 20-30 banks and building societies in the UK. Since then, these institutions have consolidated into five main names that now occupy most of the retail banking space (apart from the myriad of smaller challenger banks). I believe the same thing will happen to the platform market – it will very much be a case of “survival of the fittest” and it’s likely there will end up being just a few main platforms in the UK.
When platforms first became popular (with advisers using the functionality on platforms to provide a holistic view of investments across tax wrappers and GIAs), advisers were able to have really good conversations with clients about their objectives, time horizons, and the level of risk needed in order for them to meet their goals. We saw an influx of investment solutions that addressed these goals and objectives and a combination of multi-asset funds, risk-based funds, and advisory models dominated adviser recommendations. 20+ years on, of the £600bn in assets that currently sit on platforms, roughly 38% are in advisory portfolios according to this year’s Langcat state of the adviser nation report. With the passage of time, it is proving increasingly difficult for advisers to manage and achieve good customer outcomes in these portfolios and we are now starting to see MPS stepping into the space. We expect this to continue.
We are also expecting the decumulation market to grow – which is backed up by Broadridge Navigator’s 2020 report on UK defined contribution schemes and retirement income. To be more specific, we anticipate that around £350bn of assets will move from accumulation to decumulation in the next ten years. However, the investment risks are very different for managing money in decumulation – in particular, there is a strong behavioural risk issue that needs to be mitigated.
Therefore, the ultimate business focus for Investec on MPS is on helping advisers navigate the shifts from:
1.) advisory to discretionary
2.) accumulation to decumulation.
IFA Magazine: What is driving the shift from advisory to discretionary investment management?
ST: Advisers are looking to provide clients with good, consistent outcomes in an administratively easy way. A key issue with advisory models is that advisers are required to receive client consent before making any changes to a portfolio. This is not operationally effective – as clients often don’t get back to advisers – and therefore, prevents good, consistent outcomes from being achieved.
Furthermore, we are seeing model portfolios gain traction (with 17% of platform assets now in MPS solutions according the Langcat report) and we believe an important reason for this is because MPS allows individual changes to be made to a portfolio automatically, without the client’s consent each time. This enables a discretionary manager to make any change (whether it be a strategic asset allocation change, a tactical asset allocation change, or a fund change) and do so, across all portfolios at once and thus, in a timely and fair manner. In addition, this also relieves advisers from having to carry out robust product governance on the underlying investment solution, as this is handled by an expert team.
Therefore, I believe these factors are largely driving the shift from advisory to discretionary models and that we will continue to see more assets be moved into MPS. In addition, the latest Fundscape statistics for Q4 highlight that of the £20bn that went into platforms, £5bn went into MPS; indicating that MPS solutions are indeed becoming increasingly attractive to advisers. I also foresee the introduction of the FCA’s consumer duty accelerating this further.
IFA Magazine: How might MPS support a decumulation strategy for an adviser’s client?
RH: From our research collaboration with AKG on Central Retirement Propositions (CRP), we know advisers are increasingly adopting a bucketing approach in decumulation. In our case studies, we evaluated the practical implication of implementing a bucketing strategy via an MPS.
To examine this, we backtested the sustainability of a £500,000 lump sum investment, with a 4% withdrawal rate over a 20-year time horizon, which was invested across 3 different MPS combinations. Each model catered for a 4% allocation to cash and then allocated 6 years’ income (24%) in a Defensive, Cautious, or Income MPS to cater to clients with different attitudes to risk. This initial allocation manages sequencing risk. The remaining 72% was allocated to a Growth MPS to mitigate inflation and longevity risks.
The underlying asset allocation mix of these various bucketing portfolios ranged from a low of 61% allocated to equities to a high of 70%.
Our investigation into platform functionality confirmed that automatic rebalancing of the buckets on a quarterly basis was practically implementable.
Furthermore, our backtesting of the 3 MPS portfolios, which took into account asset class returns over the last 30 years, showed a zero probability of running out of money. Each scenario ended above the initial value of £500 000, approximately 70 – 80% of the time.
Therefore, although we cannot guarantee that the returns delivered by assets in the past will be repeated in the future, it appears that these MPS blends implemented via a platform can achieve a sustainable retirement solution for IFA clients.
However, there are some key points to consider when implementing the bucketing approach using MPS. Firstly, our examination of platform functionality highlighted some critical differences. Different platforms have different functionality and complexity – some of the platforms we looked at were sophisticated enough to combine multiple models and assets in a single solution whilst others were not.
A second factor to note is that the choice of assets in a model can also influence costs. For example, MPS strategies that use ETFs will have higher transaction costs for rebalancing on platforms.
It is also important to consider that advisers require varying degrees of flexibility to design an MPS strategy for their clients – for example, to draw monthly income and charges from income only. Therefore, platforms need to be flexible and cost-effective.
In conclusion, when implementing a CRP, advisers need to be more selective about which platforms they choose to partner with.
IFA Magazine: So, why should advisers choose Investec’s MPS?
ST: Advisers can be confident partnering with us. Investec is a FTSE 250 company and one of the largest and most prestigious private client firms in the UK. We have also been awarded a gold rating by Defaqto which is an independent and highly respected ratings agency. We have also recently been awarded the best DFM of the year by Moneyfacts for the second year running. Furthermore, we are well-known and have a distinctive brand, which means consumers will have heard of us and can therefore feel confident about who is managing their money.
Our MPS range also spans the efficient frontier and comprises eight portfolios – to cater for clients with different attitudes to risk – which all deliver good risk-adjusted returns.
Another considerable strength of our managed portfolio service is that Investec makes all critical investment decisions in-house (e.g., strategic asset allocation and tactical asset allocation decisions) – rather than relying on third parties.
Finally, Investec has one of the largest teams in the UK for researching fund managers, to ensure effective portfolio management. This also enables us to consider a wide range of asset classes and funds for our portfolios. For example, alternatives make up a significant portion of our strategies, as we have the ability to research them – which other companies may not.
We are extremely proud of our managed portfolio service and believe it can help advisers deliver strong investment returns to clients – even in the face of today’s challenging economic environment.
This article is for professional financial advisers only and is not intended to be a financial promotion for retail clients. The information in this document is for private circulation and is believed to be correct but cannot be guaranteed. Opinions, interpretations and conclusions represent our judgement as of this date and are subject to change. The Company and its related Companies, directors, employees and clients may have positions or engage in transactions in any of the securities mentioned. Past performance is not necessarily a guide to future performance. The value of shares, and the income derived from them, may fall as well as rise. The information contained in this publication does not constitute a personal recommendation and the investment or investment services referred to may not be suitable for all investors. Copyright Investec Wealth & Investment Limited. Reproduction prohibited without permission.
Simon Taylor, Head of Strategic Partnerships & Platforms
Ronelle Hutchinson, Senior Investment Director