Platform technology

How evolving platform technology can help advisers comply with regulation

David Tiller

A lot has changed since we began working with model portfolios on platforms so we commissioned a White Paper to get an independent perspective on how this area might develop. Here, David Tiller discusses the administrative issues advisers face in creating and maintaining model portfolios.

Regulation can make life very cumbersome for firms who are running model portfolios. They may encounter a whole host of administrative intricacies when creating and maintaining model portfolios, including maintaining version control, the frequency of rebalancing, and managing permissions and reporting.

This complexity is likely to continue to increase as regulation for those running model portfolios grows. Scrutiny is likely to increase as standards that already apply to risk-based funds and discretionary portfolios are extended to advisory models. Business owners are well aware that slick administration is essential for ensuring better outcomes for clients.

I believe the solution will be found in next generation platform technology. This will help firms to satisfy the regulator by providing solutions that carry out day-to-day business with improved processes and controls, to more efficiently comply with regulatory requirements.

The administrative burden of MiFID II

When MiFID II came into effect in 2018, its aim was to protect clients and increase confidence by improving transparency, oversight and communication. An honourable objective, but one with a ‘sting in its tail‘  in the form of a new level of regulatory complexity.

MiFID II generated a significant administrative burden for adviser firms. For example, consider the administrative overheads of a typical portfolio in light of MiFID II regulation. If the portfolio contains 20 funds, and an adviser does a few switches and a rebalance in a quarter, the activity can require everything from four suitability reports and 28 key information documents to four contract notes and three quarterly statements – and all other regulatory activities in between. It can add up to well over 100 pages of documentation.

The impact MiFID II can have on a firm’s capacity and productivity becomes instantly apparent if we multiply the hours of administrative overhead for this one typical portfolio by the number of clients a firm supports. Looking ahead, we believe platform businesses will need to work closely and collaboratively with adviser firms and other third parties. By working together in a more joined up manner we can change the way we do business easing the administrative burden of increased regulation.

As platform technology develops, it will bring the opportunity to scale business processes while delivering individualisation and dynamism to portfolio management. This will allow advisers to create bespoke portfolios while complying with the administrative demands of regulations.

The shape of CIPs

CIPs aren’t new, but the industry used to adopt a more fragmented approach to them. Firms were often creating bespoke portfolios for each client from – usually – limited ranges of funds. However today’s platforms have helped advisers to adopt model portfolios, which are increasingly interconnected with practice management software and reporting tools. This has helped demonstrate a uniform approach and consistent treatment of clients with the same appetite for risk. However, the very consistency that models offer can also give rise to the allegations of shoehorning as there is an expectation that individual requirements are catered for.

The challenge for the platform market has been to have the architecture in place to meet the somewhat conflicting demands of an evolving and highly regulated market. At Standard Life, we realised early that it would become essential to segregate the investment process and financial planning. In 2014, we launched our Investment Hub capability that offers specific tooling and separate authentication and security for investment professionals. We’re five years down this road and we’ve made a huge amount of progress but there’s still more to come.

The smart features of Professional Portfolio Manager

The developments we’ve made to our Professional Portfolio Manager (PPM) capability on our Wrap platform can help advisers serve clients more effectively at any stage of their financial life cycle. It offers the ability to mix and match models to:

  • support multi-goal and multi-pot strategies
  • control income strategy at model portfolio level;
  • allow access to cost-efficient ETI trading

In addition, PPM offers a level of automation that lets users rebalance mechanically. What we’ve learned from talking to advisers is that there are a range of rebalancing problems related to client consent, time, portfolio considerations, market issues, compliance and platforms. Mechanical rebalancing reduces the time it takes to complete the process, makes it possible to exclude certain clients, matches portfolios to cash flows, and prevents portfolio drift to help keep clients within their appropriate risk categories.

Our platform's direction of travel reflects the thinking in 'The Future of Portfolio Management on Platforms'. Our main goals now are to:

  • remove administrative pain and compliance headaches
  • increase efficiency to help with capacity challenges 
  • help advice firms future-proof themselves by setting up systems that can enable them to better manage regulatory change

We believe that our new PPM capability will free up adviser time so they can focus on the tasks that improve client outcomes, especially in retirement. The next wave of platform development is exciting as it really starts to democratise individualisation allowing many more people to benefit from an individual advised solution. The race is on but it will only be the platforms that have invested in the right architecture that will have the sophistication to be able to orchestrate dynamic investment and planning strategies against real life client goals. That's the goal we're aiming for.

The value of investments can go down as well as up, and could be worth less than originally invested.

The views expressed in this blog should not be regarded as financial advice.