Series introduction
The advice profession is evolving rapidly. One of the biggest shifts we’re seeing is how firms approach investment management. For years, most advisers managed client portfolios in-house through a centralised investment proposition (CIP). But with increasing regulation and complexity of client needs, the administration and risk associated with designing portfolios and rebalancing are becoming harder to manage.
It’s not surprising, then, that many firms are outsourcing portfolio management to discretionary fund managers (DFMs). While Managed Portfolio Services (MPS) in particular have grown in popularity, some advisers are concerned about losing control of their clients’ investment strategy. Bespoke custom portfolios, which are designed in partnership between the advice firm and DFM through a co-manufacturing agreement, are less well known but offer an excellent middle ground between in-house CIP and MPS. They allow advisers to retain input and control over client objectives, while benefiting from the DFM’s investment expertise and oversight, helping advice firms to derisk and reduce their admin burden.
In this series of blogs, we’ll explore how custom portfolios add value, how co-manufacturing works in practice, and why it could be the next step forward for managed portfolio solutions.
Adding value through custom portfolios
Financial services, like any industry, goes through shifts and changes. Sometimes these can be quick and pronounced and other times they are subtle and cumulative. Often, sizeable shifts in regulation can trigger all these dynamics at once.
It is no secret that Consumer Duty has prompted some realignment, both immediate and ongoing. Among the more significant changes is a reassessment not only of how value is delivered, but how that value is understood by clients and the regulator.
Outsourcing portfolio management to a discretionary fund manager (DFM) has materialised as a key route for many firms. When done well, working with a DFM can visibly and transparently strengthen portfolios, improve client outcomes, demonstrate compliance with the regulations and give advisers more time to focus on what they do best: financial advice.
The trend towards outsourcing
Post Consumer Duty, many firms managing their central investment proposition (CIP) in-house found their workload increasing significantly. Our 2024 research ‘An Overheating CIP’ highlighted that firms running models in-house spent 139 days per year on associated administration. In addition, we found that 38% expected the burden to increase over the next year.
As a result, more advisers are seeking ways to rebalance their workload to deliver better, more transparent value. One way to achieve this has been to outsource to a Managed Portfolio Service (MPS). The lang cat’s State of the Advice Nation report earlier this year revealed that 71% of firms now use an MPS for at least some of their client investments. This has proved effective at dealing with the admin burden: our Overheating CIP research found that outsourcers spent 32.5 days less on CIP operations, less than a quarter of the time needed by those managing them in-house.
Yet, while outsourcing to an MPS provider delivers clear advantages, not all advice firms are comfortable with passing all client investment responsibility to a third party. Our Overheating CIP research found that major concerns included the firm losing control of the process (61%), cost (59%) and the risk remaining with the IFA (39%). This is where custom mandates can add meaningful value.
How custom adds visible value
With custom portfolios, advisers work in partnership with the DFM under a co-manufacturing arrangement to design a portfolio that more closely aligns with the target clients’ risk appetite, ethical preferences and financial goals. The adviser remains in overall control and is responsible for the client relationship and suitability, adding value through financial and tax planning activities. They provide input into the investment design, and then the DFM is responsible for managing the client’s money in line with the agreed mandate from the adviser, using its access to specialist research, resources, and attractive fund pricing to improve outcomes and lower overall costs.
A robust value ecosystem built on quality communication
This collaboration creates a robust value ecosystem, where the value that needs to be delivered to clients is understood and realised at every stage of the process. With all roles clearly defined, client objectives and subsequent actions are consistently documented and communicated.
Advisers can demonstrate the DFM’s understanding of the clients’ objectives, and clients can be confident that they are being met. Regular communications and investment updates from the DFM via the adviser provide further proof to clients and the regulator of the value and expertise being added by the relationship.
Is custom the future of managed portfolios?
Although there has been a long-term trend towards investment outsourcing, it’s clear that the new requirements introduced under Consumer Duty have increased firms’ desire to reduce administration and operational risk, while clearly demonstrating value to clients.
However, traditional MPSs are becoming increasingly commoditised and may not always meet all the advisers’ needs. This is where custom solutions and co-manufacturing can add significant value.
In the next blog, we will demystify the operational side of the custom model and explain what we mean by co-manufacturing in practice.
This article is intended for regulated financial advisers and investment professionals only. Copia does not provide financial advice. This information is not intended as financial advice and should not be interpreted as such.
