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Better Portfolio Propositions

The Model Portfolios Journey to Managed Investments 2.0

By 18 November 2013No Comments
A sneak preview on a paper that I am writing about the journey that the industry is on kicked off by the use of model portfolios….
 Below is a slide that I am using quite a bit to highlight that model portfolios are not the end game, but just the start of what I call the transition from ‘Managed Investments 1.0’ (the ‘old’ product distribution based industry model) to ‘Managed Investments 2.0’ (an industry architecture that is in line with recent regulatory changes and consumer engagement models).

FS Consulting Methodology 0.1

Some key points from this slide:
That the use of model portfolios is just the start of this transition. The journey starts off with the use of model portfolios often being a solution to compliance and practice efficiency to help advisers choose products (in the early days they were perhaps called ‘preferred’ lists).  This evolves into the use of model portfolios to be an improved way to support the systemised implementation of asset allocation, product selection and the basis for a level of operational efficiency. We are seeing that in Australia and the UK, some 80% of new business is being implemented using ‘model portfolios’ and not surprisingly there are questions being asked by regulators as whether this is good practice, or just ‘show horning’ clients into a new method with a new way to justify fees from clients. Systems and technology to support this first use of model portfolios are generally based around automating some administrative processes about the allocation of monies to funds on a periodic basis.
 Then there is a distinct phase that follows when the initial use of model portfolios  moves into broad based adoption. Beyond the use of model portfolios in the first phase, industry participants become under pressure to deal with:
  • The regulatory issues in the form of ensuring client portfolios and adjustments to them are in the best interests of the client, for example it is no good just rebalancing a set of funds if for example the rebalance results in an event that could not be in the clients interests such as a capital gains tax event, and that it perhaps need to be clear and agreed with the client when portfolios will be rebalanced, by who, when and to what service levels
  • Consumer pressures, often in the form of investors throwing spanners in the works of instructing their adviser to not sell a specific fund, or not buy one from fund manager XXX because they don’t like them. The impact of these real instructions on the systemised operating model is now starting to be fully understood. In short it makes what started being a simple solution and problem to solve to one that gets rather difficult and complicated
  • Competitive pressures, where 2 things start to happen, firstly that as consumers see the same model portfolio trend across an industry, differentiation becomes less and price pressure start to form placing operational efficiency pressures on providers of model portfolios, but also that consumer direct platforms start to offer model portfolios also directly at very low costs (look at nutmeg, marketriders etc). Naturally as consumers and their advisers start to examine overall fees more closely, model portfolios of lower cost passive funds such as ETFs and securities start to emerge to displace the value that active asset managers may have filled in the past.
It is in this second phase which we are entering now that we are starting to see tremendous amounts of innovation in both what the investment proposition actually is (yes it has to be more about the client in order to sell, yes it has to be lower costs (there is research that suggests that consumers move only when something is 20% cheaper than the incumbent), and it has to be slick), but also the need for fully systemised, automated (yet highly controlled) processes for the rebalancing and operation of portfolios. The key fundamental issue at this stage is how to resolve delivering a client centric (or client coach supporting) proposition with scale and efficiency, and with such complexity in solving this problem, the answer pretty well only is achievable with very specific technology for such a purpose, which is quite different from the technologies of where model portfolios started the journey on. At Financial Simplicity we have lived and breathed this for over 10 years already and appreciate the challenges that anyone would experience in taking this challenge on….

Please send me an email if you have any comments

Stuart Holdsworth

Author Stuart Holdsworth

Stuart has over 30 years of experience in the use of technology for the strategic competitive advantage of businesses in the financial markets and investment industry.

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