The MPS-DFM-platform ecosystem faces growing strain as inefficiencies mount and expansion continues. In her latest blog for IFA Magazine, Novia’s Linda Johnstone (pictured) tells us why she believes that addressing legacy tech, fostering collaboration, and understanding mutual needs are vital to safeguarding sustainability and ensuring advisers and clients receive effective solutions amid rising regulatory pressures.
According to a recent report, the growth of model portfolio services is already exerting substantial strain on platforms. Eventually, it is claimed, the entire MPS-DFM-platform ecosystem could crash[1].
The good news is that this gloomy outlook assumes all the problems that currently afflict the ecosystem are left unaddressed. The bad news is that right now those same problems are only getting worse.
The most worrying shortcomings are widely known. Arguably foremost among them are the sizeable administrative burdens frequently imposed on DFMs and the numerous risks to which these can lead[2].
There is every likelihood that the ecosystem will become even larger over the next few years. It remains, in the words of the aforementioned report, “an invaluable investment solution for advisers struggling with rising regulatory demands and complex markets”.
So how might we ensure continued growth does not merely amplify existing failings – potentially to a disastrous degree? A good starting point is to understand precisely what each stakeholder expects from the other.
What a platform looks for in a DFM
As a platform that partners with multiple DFMs, we clearly care about performance. Our interest is likely to be piqued only if a DFM’s data tells a tale of solid returns over a significant period – as opposed to one of occasional peaks amid short-term volatility.
We also pay close attention to costs. As a rule, these should be neither sufficiently high to promote alarm nor sufficiently low to provoke doubts over credibility and staying power.
Beyond these more obvious considerations, what resonates especially strongly with us is the prospect of a genuinely collaborative relationship. We prefer to deal with DFMs that are truly willing to work closely with us.
Why does this matter so much? Our view is that the ultimate goal should be to provide MPS solutions that are genuinely capable of delivering superior outcomes for clients and their advisers.
This is likely to happen only if a platform and a DFM share a commitment to meeting unmet needs as effectively as possible. A partnership in name only is rarely able to go far enough in this regard.
What a DFM looks for a platform
We like to think DFMs look for the same openness and synergies when choosing a platform. What they are also looking for, of course, is a platform whose technology is thoroughly fit for purpose.
This brings us back to the threat of collapse. In our opinion, the main reason for the strain under which the MPS-DFM-platform ecosystem now finds itself is that many platforms are unable to stay at – or even get close to – the cutting edge.
More than a decade has passed since the Retail Distribution Review fuelled a marked rise in advisers’ use of outsourced investment solutions. Platforms have been under huge pressure to improve their functionality ever since.
Many have struggled to keep pace and are now saddled with outmoded tech that hampers crucial MPS processes and promotes inefficiency. Legacy software and infrastructure must be recognised as a major source of stakeholder stress and heightened risk.
Meanwhile, at the other end of the spectrum, newer market entrants may turn out to be too innovative. A platform that claims to be beyond the cutting edge can sound exciting, but its tech might be found wanting if it has not been fully tested and validated in a real-world setting.
Towards sustainable growth
More than half of the UK-based advisers questioned in a recent survey reported using MPS for over 50% of their client base. In addition, more than two thirds predicted their proportion of assets under management in MPS would increase[3].
This further underlines that there is very likely just one direction of travel here. The MPS-DFM-platform ecosystem is poised to become bigger and more complicated – which means the challenge of safeguarding its sustainability should be seen as urgent.
The regulatory community will surely have its say at some stage. It is already exploring the difficulties surrounding MPS administration, which are in grave danger of serving as a barrier to further growth.
Yet platforms and DFMs have their own parts to play. As the principal components of the ecosystem, we have a responsibility to build something that works well and is ready to cope with whatever demands are placed on it over time.
We have discussed here what platforms want from DFMs and what DFMs, in turn, want from platforms. Ultimately, though, it is what advisers and their clients want from both of us that really matters.
Linda Johnstone is Novia Global’s Head of Investment Proposition.
[1] See, for example, Equisoft: Transforming Investment Management: The Rise and Risks of Model Portfolio Services, 2024 – https://www.equisoft.com/insights/investment/transforming-investment-management-the-rise-and-risks-of-model-portfolio-services.
[2] See, for example, Wealth DFM: “Insight: Novia Global’s Linda Johnstone lifts the lid on how DFMs’ woes underline why platforms can still be difference-makers”, September 17 2024 – https://ifamagazine.com/insight-novia-globals-linda-johnstone-lifts-the-lid-on-how-dfms-woes-underline-why-platforms-can-still-be-difference-makers/.
[3] See, for example, Equisoft: Transforming Investment Management: The Rise and Risks of Model Portfolio Services, 2024 – https://www.equisoft.com/insights/investment/transforming-investment-management-the-rise-and-risks-of-model-portfolio-services.
