In this her first (and very insightful might we add!) blog for IFA Magazine, Linda Johnstone (pictured), Head of Investment Proposition at international platform Novia Global, reflects on some of the practical problems experienced by certain MPS providers and DFMs and why the right platform technology can prove transformative. Plenty of food for thought for advisers and wealth managers that’s for sure!
Interviewed more than a decade ago, Novia co-founder, Bill Vasilieff, highlighted the nascent links between investment platforms, DFMs and model portfolio services. He predicted these relationships would grow in importance[1].
As an acknowledged trailblazer in the platform arena, Bill possessed an uncanny knack of foreseeing our industry’s future[2]. In this instance, too, he was right. Fast-forward to the present day and we find the significance of the platform-DFM-MPS nexus is greater than ever.
This was indirectly illustrated by recent revelations about the operational risks inherent in some MPS processes. In particular, according to a study by NextWealth, portfolio rebalancing can routinely become the stuff of nightmares if suitably firm foundations are not in place[3].
Rebalancing requires a portfolio to be frozen, as a result of which contributions and withdrawals are temporarily suspended. The principal point of interest here, of course, is what we mean by “temporarily”.
It turns out that in some cases, extraordinarily, the freeze might stretch to a hundred hours. NextWealth reported such drawn-out dramas occur every month as DFMs struggle to ensure rebalancing is completed and processed without any inaccuracies[4].
How can this be? It is often a question of substandard technology and competing software systems – a horrible combination that compels many DFMs to manually input trades, sometimes painstakingly cross-referencing every action against spreadsheets.
Mistakes are likely to happen against such a trying backdrop. They are also likely to prove costly – and not just in financial terms. NextWealth cited the unhappy tale of an analyst who “cried for two days” after making an error that slipped through the net[5].
Needless to say, advisers and clients might also be left in tears. The problems arising from these outdated, blunder-prone practices are hard to ignore and perhaps harder still to accept.
In seeking to understand how to guard against such disappointments, it is first essential to appreciate the extent to which times have changed. In tandem, it is vital to discern who has kept pace with that change and who has not.
Advisers’ use of outsourced investment solutions rose substantially in the wake of the Retail Distribution Review (RDR), which came into force at around the time Bill was offering his aforementioned thoughts. This growth obliged platforms to invest in the functionality necessary to support third-party DFMs and MPS.
The pressure to update and improve has endured ever since. Yet not every provider has responded accordingly, with many still employing systems that were never designed to accommodate the volumes of assets and levels of complexity that are now commonplace.
Equally, many of the platform world’s newer entrants are latecomers to this learning curve. As a consequence, although ostensibly innovative, their approaches might be insufficiently tried and tested in areas that really count – onboarding and reporting, for example.
Ideally, a platform should see itself as an active partner for DFMs – a synergistic means of identifying and satisfying their unmet needs. Such a mindset is likely to benefit all stakeholders – advisers and their clients included – and notably diminish the threat of oversights and inefficiencies.
Even then, though, the fact remains that DFMs live or die by their performance. A strong partnership with the right platform may go a long way towards enabling them to focus on this imperative, but there will still be occasions when advisers and clients feel justified in taking their business elsewhere.
This raises an alarming prospect. If a monthly rebalancing can demand up to a hundred hours’ work, as NextWealth found, imagine how much effort might be needed to move from one DFM to another. If the underpinning software and structure is lacking, the saga of disinvestment and reappointment could be lengthy – not to mention agonising.
Yet it does not have to be. A platform that partners with multiple DFMs and whose tech has evolved sensibly and successfully over time should be able to facilitate a switch within a matter of minutes – which in turn should translate into less cost, less time out of market and less stress.
It is arguably the last component of the above list – stress – that all concerned would most like to reduce. From weeping analysts to anxious advisers, from disenchanted DFMs to disgruntled clients, the appetite for genuinely effective solutions is increasingly manifest.
Bill Vasilieff originally recognised platforms’ capacity to make a positive difference almost a quarter of a century ago. He continued to recognise it when the RDR was implemented. And if he were still with us, without a doubt, he would recognise it again today.
Linda Johnstone is Novia Global’s Head of Investment Proposition.
[1] See FTAdviser: “Addressing the relationship between DFM and platforms”, February 25 2013.
[2] See, for example, FTAdviser: “Tributes pour in to ‘industry legend’ Bill Vasilieff”, November 20 2023.
[3] See NextWealth: “Keeping MPS clients in focus”, June 2024.
[4] Ibid.
[5] Ibid.
