Platform technology

How future platforms will improve individualisation and model portfolio methodologies

David Tiller

To explore the future of model portfolios on platforms, we commissioned a White Paper, ‘The Future of Portfolio Management on Platforms', from the lang cat.

Here David Tiller, Head of UK Propositions at Standard Life, discusses his thoughts on how platforms of the future will help advisers respond to new model portfolio methodologies and deliver more individualised solutions for investors.

Due to cost pressures, the investment landscape is changing

Markets have been kind to investors over the last decade. Then, in 2018, Brexit, geo-politics, emerging markets, trade wars and tariffs surfaced and markets hit a rough patch. For the first time, advisers were hearing from customers whose portfolios had negative returns.

Though the subject of costs and charges to investors has always been an issue, the arrival of lower returns and volatility have brought this matter into an even sharper focus. With choppy markets, advisers in the UK are looking at all the constituent segments of investing to make sure each part is priced competitively and are also studying innovative new approaches, like hybrid strategies, which combine multi-manager, directly invested and passive approaches.

In America, they're facing the same downward pressure on costs as we are, but they're a bit further than we are on this journey. Advisers in the States have put aside the philosophical debates about whether active is better than passive, and are already comfortable with using a blended approach, with passive seen as a price balancer and active for seeking returns. We're exploring these approaches now in the UK.

Overall, the issue is not about whether one is aligned to active or passive. It's about redoubling efforts to create more cost-effective investment solutions for clients. What advisers are trying to do is create the best possible portfolio at a target price and suit client requirements.

As we develop our platforms, the better we are at delivering upon our promises to advisers, including reducing platform and investment costs, and the more effective we can be at helping adviser businesses, increasing the likelihood that they can deliver a proposition to their clients at a price that makes sense.

New platforms will bridge the innovation gap

The hybrid trend underway is compatible with model portfolio methodology. But other new and innovative assets like thematic equity funds (such as those focusing on renewable energies), Environmental, Social, Governance (ESG) type investments, privately listed companies, unconstrained options and more pose challenges for the traditional strategic asset allocation (SAA) model.

Harry Markowitz developed his modern portfolio theory (MPT) in 1952, well before today's innovative new active asset classes were established. MPT is brilliant - and very traditional in terms of its allocation of equities, bonds, and its geographic split. As a result it lacks slots for assets that fall outside what it defines as asset classes. There might be a bit of property or something else in the SAA, but there's no place for new, innovative products like the aforementioned thematic equity funds, ESG-type investments, privately listed companies, and even more traditional equity funds that do not follow a market benchmark (such as unconstrained funds).

My feeling is that if advisers are to help their clients, it's good for them to be able to consider everything now available in the marketplace as an option, including these newer asset classes. In the future, investment platforms will grow to encompass a wider range of methodologies, to offer more flexibility and choice to advisers and their clients.

Also, since some of the most innovative investments are considered too complex for retail clients to understand and purchase themselves, new platform technology will be able to facilitate the move from advisory to discretionary portfolio management. By giving dedicated investment professionals authority, clients can gain access to a wider range of investments knowing their chosen manager has the expertise and mandate to leverage these instruments to their advantage.

 

As well as the scalability and efficiency aspects that new platform technology offers, we will start seeing technology able to push through a lot more individualisation and create solutions more tailored to individual client needs.

 

Next gen tech will enable greater individualisation

People say that the power of working with an adviser is the knowledge and insights the adviser has of a client's specific issues and circumstances, but I disagree. This is a powerful enabler but, if the adviser's knowledge isn't translated into action with the creation of financial solutions that reflect the client's unique situation, then their knowledge of the individual is not valuable as it is not being used. In the future, as well as the scalability and efficiency aspects that new platform technology offers, we will start seeing technology able to push through a lot more individualisation helping advisers deliver solutions more tailored to individual client needs.

Perhaps the most material opportunity lies in the data which sits on a platform - data that could help to drive more personalisation. This potential isn't being exploited within our world nearly as much as it is being used elsewhere, yet. But the time is coming when we will be taking the platform's scalability and data processing power and applying it to create more individualised solutions on an industrial scale.

Easier asset exclusions and substitutions to personalise portfolios

New platform technology will enable us to implement a wide range of client requirements, such as asset exclusions, Capital Gains Tax strategies, and asset substitutions, quickly and simply. Clients that previously fell outside advisers' core processes can be accommodated. Auditors can avoid exposure to businesses they are auditing. Capital Gains positions can be actively managed, fully exploiting a client's allowances and offsetting losses. Cherished assets can be accommodated without disruption.

We know some clients have strong preferences and can be troubled by investing in firearms or petroleum products. But asset exclusions may not always stem from your clients. Adviser businesses also have clear philosophical views and tactical requirements. For example, for some, asset liquidity is paramount and may wish to prevent their clients being exposed to assets where this could be problematic. The motivations to constrain are many and varied. The technology needed to enable this will, however, be here soon.

Why is this important? In the investment space, the regulations present advisers with a serious challenge. Centralisation helps with efficiency and ensures fair and consistent treatment of clients but also risks accusations of ‘shoehorning' - damned if you do, damned if you don't. The way I think about it, this inherent contradiction really is all about resolution. From a distance, people all look alike. As you get closer, their individual differences are more discernible.

As a population we share many common characteristics but individually we all have our individual preferences. Advancements in technology mean we're moving towards the time when we'll be able to deviate from the models and provide people with the assets they want in the categories they want to support while also maintaining the strength of the portfolio to support good outcomes.

More choice and individuality for better client outcomes

Platforms cannot be a barrier for advisers. Not only should platforms help advisers scale their advisory investment processes, fulfil regulatory obligations, and keep up with demand - they should also help advisors to access new capabilities.

Platforms will soon streamline the process of removing unwanted assets from a client's portfolio and make substitutions to comparable assets with similar characteristics that will also align with a client's values. Advisers can offer their customers a level of personalisation in a far more efficient manner than ever before.

A lot has changed since we began working with model portfolios on platforms about a decade ago, and as always, we continue to focus on making improvements to the technology with the goal of helping advisers to create more effective model portfolios and provide deep value for their clients.

Obtain your copy of the white paper: The Future of Portfolio Management on Platforms by the lang cat, commissioned by Standard Life.

 

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.