At first glance, Model Portfolio Services (MPS) look like one of the investment industry’s great success stories. Recent data shows that assets in discretionary MPS had reached £123bn in March, up 28% in a single year, with many advice firms planning to increase their use over the next 12 months. The growing emphasis among many advisory firms on financial planning rather than investment selection—intensified by Consumer Duty—is leading advisers to increasingly choose MPS options.

But there are cracks. There are worries over the regulatory impact of erratic implementation. There is considerable variability in the skill and ability with which platforms are able to execute MPS, a pressure that is likely to increase as new entrants and structures emerge. Equally, there are concerns that a shift in the UK tax regime may tip the balance in favour of unitized products. 

Our recent roundtable with some of the UK’s leading investment managers took the pulse of the MPS market today and showed plenty of confidence that the core drivers for MPS growth remain in place. A greater regulatory burden is still driving advisers to outsourced solutions. MPS retains some advantages as a cost-effective solution and fees have been falling, important for increasingly cost-conscious advisers. The transparency of MPS is also important, advisers like the clarity of being able to see the underlying holdings, which enables them to ask questions.

Nevertheless, there are signs that the arguments for a unitised approach are strengthening, particularly if there are onerous capital gains tax changes in the budget at the end of October. Equally, advisers are growing increasingly conscious of the administrative wrinkles in implementing MPS on platforms. This leads to the shakier conclusion that while clients always need a range of solutions, and it remains a fertile environment for MPS growth, there are challenges providers need to address. 

Breadth of choice 

MPS offerings continue to expand. There are new entrants into the market all the time, including research providers and asset managers. While increased choice is undoubtedly welcome – giving different client demographics more options and making it easier for advisers to show that they have solutions to meet their needs – they need to offer something new, rather than simply providing similar solutions at lower cost. The easy growth in the MPS market is potentially behind us.

There are undoubtedly technological challenges associated with a greater proliferation of MPS options, and it can be tempting for providers to repackage tried and tested solutions. There are risks that MPS solutions become commoditized if MPS providers do not push the platforms to manage new offerings.  

Risk profiling is a significant driver of outcomes for clients, but the need to accommodate risk-ratings is another challenge in ensuring diversification within the MPS market. There is evidence that this can lead to clustering, with the reappearance of certain funds in similar return profiles. However, there remains plenty of differentiation and adviser groups are still using MPS in a variety of ways to build portfolios and manage risk. 

Active versus passive

Over the past decade, the drive to passive funds has been relentless, with around a quarter of the assets in UK retail funds now held in passive funds. This has been a feature of MPS solutions as well. The outperformance of a handful of mega-cap companies has made passive investments a successful strategy for more than a decade. However, this has been supported by low interest rates, and the environment has changed. 

Can the popularity of passive funds remain in this new climate? Certainly, the fee narrative isn’t going to change and advisers need low cost options. However, the focus on passive could shift if the market shifts. Equally, if MPS providers design more differentiated portfolios with, for example, the inclusion of private assets, the focus may divert from ever-lower fees. There is some impetus to bring active management into low cost solutions and the new LTAFs may also change the market. 

The ‘bad platform’ problem and implementation

Platforms were not designed to host MPS solutions, and some have proved ill-equipped to cope with adviser demand. This has prompted concerns over the regulatory risks inherent in erratic implementation. Some horror stories have emerged, with clients being out of the market for long periods, or differences in performance between clients with the same risk profile. This has placed a significant administrative burden on some discretionary fund managers, who have needed to keep a close eye on the implementation of their models. 

It is clear that some platforms perform better than others. Advisers are increasingly aware of the problem. Risks are costly and if there are risks and administrative difficulties introduced with a simple rebalancing, this negates the advantages of outsourcing for advisers. Where an adviser has to spend time chasing errors, they’re likely to question an outsourced choice very quickly. Advisers are requiring platforms to demonstrate that their clients are getting good outcomes. Increasingly, they are voting with their feet if they don’t get the answers they want.

Fee levels: a race to the bottom?

The pressure on fees continues. In the US, some MPS providers have gone as far as charging no fees and using the model as a vehicle for their own funds to recoup their costs. There is no sign of this happening in the UK for the time being, and this type of approach is particularly difficult to implement if an adviser wants a lot of support for the client and the regulatory environment is significantly different this side of the pond. Greater tailoring and innovation could dissipate some of the fee pressure, rather than MPS providers offering similar products at ever-lower cost. 

Ultimately, a greater focus on ‘value’ over cost would be welcome. The right solutions for each individual will be different – there will be M&S shoppers and Aldi shoppers. Advisers also need to ensure they are using the right performance metrics. Making judgements on too short a time period can lead to a pack mentality. 

MPS providers don’t have the luxury of starting from scratch. They must work within the constraints of the platforms. That said, they are moving towards a world where there could be a menu of choices for MPS, with options for asset allocation, active versus passive and other forms of tailoring. Whatever the flavour of MPS chosen, service and communication will be very important. Every MPS will experience periods of weakness. MPS providers need good communication to ensure clients and advisers stick with their process and don’t fall into the trap of shifting providers just as performance is about to turn. 

In Conclusion

The investment managers that spoke at our recent MPS  roundtable discussed a number of very important themes that will determine the future of MPS into the future. MPS continues to have strong tailwinds but there are challenges on the horizon. The industry needs to continue to harness innovation to create differentiated investment propositions, rather than launching similar solutions at ever-lower cost. It also needs to work with platforms to address a range of technical challenges that have emerged, and that could be a regulatory headache in the making. Lastly, investment firms need to communicate the MPS value proposition effectively with both advisers and their clients. MPS has grown fast and proliferated. A well-thought out and disciplined approach to managing MPS will ensure the success story continues.

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