Dark clouds closing in for model portfolio incumbents

Dark clouds closing in for model portfolio incumbents

Discretionary managers have long sold the benefits of Model Portfolio Services (MPS) for financial advisors and their end clients...

IA Fintech Member Insights: Jacobi Strategies


Change is in the air

Discretionary managers have long sold the benefits of Model Portfolio Services (MPS) for financial advisors and their end clients. Brochures advertise a service that allows clients with fewer savings to access the same models as sophisticated buyers. Customisation for the end client then comes in the way that advisors map their risk profile to a specific model. However, the differentiator between incumbent MPS providers has commonly been cost when the greater opportunity lies with delivering on value.


Race to the bottom, bottomed out?

For providers, MPS can be a lucrative business, reaping the benefits of economies of scale while charging on a % of asset value basis. But recent market turmoil should leave doubts on the current landscape and future direction.


Already, we have seen signs of a race-to-the-bottom in pricing of new offerings – cost has been an easy way for new entrants to differentiate. A typical portfolio under an MPS banner will have a discretionary fund management (DFM) fee, platform fee and underlying fund charges. Combined, that’s typically a cost of between 1.0-1.7% per annum of a client’s portfolio.


New, cheaper entrants have challenged that. By capitalising on passive funds to get market beta cheaply, new competition is lowering the cost of MPS offerings. Some providers have even removed the link between size of a client’s portfolio and cost by introducing a capped fee structure.



Cost doesn’t need to be the only differentiator

While cost represents one end of the MPS battle ground, a new middle ground is developing – one in which emphasis is on the overall value being provided to the advisor and end client. By focusing on the quality of services that support model portfolios, providers can avoid being displaced.


To differentiate on value, MPS must include much more than access to a model portfolio via a platform, basic information on performance and reporting through a quarterly factsheet. For example, many advisors want access to risk modelling tools, forward projections, fund selection research and tactical asset allocation recommendations. And as the current volatility reminds us, access needs to be dynamic, digital and

real-time. Crucially, it is these additional services that allow advisors to proactively communicate with clients, demonstrate their value-add and strengthen their long term relationships.


Outsourcing investment management shouldn’t mean complete control is eroded

Many advisor networks traditionally managed client portfolios in-house, with a central investment team providing the building blocks for portfolio construction. MIFID II requirements on transparency and cost however meant that outsourcing became an attractive alternative. For some firms, this presented a cultural challenge – reduced flexibility makes it difficult for advisors to differentiate on the basis of the investment proposition.


But for those firms that wish to retain a level of investment control, there is a new middle ground. More progressive MPS offerings allow for a tailored suite of models for a specific advisor network. Advisors can then have direct input into the portfolio design process. This can be extended into tools to help advisors advise their clients. The challenge with this hybrid model is making it truly scalable, alongside ensuring the entire process is appropriately governed and monitored. That’s a technology challenge.


Differentiating on service is the opportunity

As with any consumer product, popularity attracts attention. Asset managers, consultants and wealth managers continue to look for opportunities to grow their traditional revenue streams, so the threat of new MPS players can’t be understated. But looking ahead, MPS providers need not solely compete on cost.


Leveraging technology to improve the scale and delivery of MPS allows providers to tap into their sophisticated investment processes and improve the quality of client portfolios. And importantly, it can allow them to revolutionise the service provided to advisors and their end clients. But for those that don’t think that technology should be central to their MPS offering, cost may become their only selling point.


To learn more about how Jacobi works with asset managers, owners and consultants to solve

investment technology challenges, visit www.jacobistrategies.com

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