I have been involved in much discussion in the last few weeks about the difference between Discretionary Investment Management (DIM), often a service to the wealthy, and the use of model portfolios which may be ‘managed’ by investment platforms.

At first glance there is some similarities from an operational perspective, especially if a DIM firm uses model portfolios as a starting point for packaging investment research into a form of scalable offer to many clients. Similarities can include the use of model portfolios and an authority for someone to occasionally rebalance the clients portfolio towards the model portfolio. However from a service proposition perspective things can be quite different, as I have tried to bring out in the diargram below:

From a servicing proposition, a DIM is usually pretty clearly responsible for all aspects of the service to a client. the DIM firm packages up research, investment selection, portfolio management and administration often into a single accountable offer.

The provision of a vanilla model portfolio service clouds the proposition a little in the sense that the model portfolio may be sourced from a third party, and the implementation of the model portfolio may also be performed by a third party (usually a platform) also. However with adequate discolsure and explaination, these ‘straightjacket’ model portfolio offers are getting increased traction, albeit with some concern from regulators and commentators, who are suggesting that the ‘implementation’ of model portfolio decisions may need to reflect the clients’ specific situation. These concerns seems pretty reasonable as the implementation process is actually often buying and selling investments for clients and whilst such decisions may be accurate in the context of a model portfolio, they may may be not in the interests of the client. MMmmmm. So how is this possible conflict to be resolved ?

The answer must lie in allowing adviser or clients to provide some instructions on how to implement model portfolios for their specific circumstance. At Financial Simplicity we call these clients rules, preferences and constraints, and believe that the ability for advisers to provide such instructions help implementers (who have no relationship with the client usually) deliver improved service to investors, and hence support their advisers, aswell as address concerns about investors receiving a ‘1 size fits all’ experience against their wishes.

Clearly this does however create a headache for implementers not equipped to deal with such instructions from advisers and their clients, and the problem magnifies and magnifies the larger the client base becomes. This is where specialist technologies come in..