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Why platforms must allow financial planning and investment management to work in harmony for better client outcomes

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 the way financial planning and investment management continue to evolve as two distinct disciplines.

Since the introduction of platforms in the UK and the evolution of portfolio management technology, the number of adviser firms running their own centralised investment propositions (CIPs) has significantly grown.

Research findings recently published in The Future of Portfolio Management on Platforms , reveals that around 55 per cent of adviser firms are running their own advisory models in-house, with substantially fewer running their own models on a discretionary basis.

The stark realities of MiFID II

Although running advisory models in this way has become widely accepted, the method has been coming under increasing scrutiny over the past couple of years in the shape of growing regulatory pressure and MiFID II.

Although MiFID II was introduced to improve transparency standards for investors across Europe, it has also introduced a huge administration burden on advisers. The sheer volume of disclosures, client consents and documentation now required to run advisory models means that the bar in terms of administration is rising all the time. Administration is also expensive and I have yet to see evidence that advisers who run their own models are able to pass on these increased costs, making them a direct bottom line hit.

A move towards the ‘professionalisation’ of investment management

Regulation is making it more challenging for adviser firms to run advisory models, at scale, as part of their business propositions. In the future, running models will require advisers to commit to increasing resource. Furthermore, as firms find themselves accountable for areas they weren’t previously responsible for, running models may become either uneconomic or add unacceptable risk.

The increased regulatory oversight is quite deliberate. The regulation is essentially creating a polarisation between financial planning and investment management and the subtext is a move towards the ‘professionalisation’ of investment management. Essentially, the regulation is telling us that if advisers want to do investment management, then it must be done to a high standard (measured in terms of governance).

As The Future of Portfolio Management on Platforms suggests, the direction of travel is moving towards the delineation of financial planning and investment management activities, with these disciplines evolving to be separate components of the advice process, either inside or outside the adviser firm.

And the shift is starting to happen now.

There is some method in the regulation

A number of adviser firms have already carved out their investment management, employing specialist investment management staff and moving towards discretionary permissions because, although some operating costs may be higher, the administration load is less. Others have built deeper, more strategic relationships with the investment groups they entrust with client portfolios.

As a platform provider, we’ve already seen an increase in the professionalism of investment processes and this is an ongoing trend. Either this is a remarkable coincidence or there is some method in the regulation. Whether the investment management part of the advice journey is ‘carved out’ in-house or outsourced entirely, the regulator will feel it has achieved its goal.

Take advantage of the platform technology emerging now

Harnessing emerging platform technology can help both with the administration burden of running advisory models in-house and with the professionalisation of investment management. Automation is the key but this brave new world will not happen without some considered planning. Both platform providers and adviser firms will have to evolve their approaches to reflect what the technology can enable.


This brave new world will not happen without some considered planning. Both platform providers and adviser firms will have to evolve their approaches to reflect what the technology can enable"


If a strategy can be worked out in advance, then it can be automated. The adviser can pre-agree actions with the client which can then be mandated on the platform. What’s important is this concept of mandating advice, because once an adviser has a mandate from the client, this can be programmed into the platform. Conversely, if the adviser does not have a mandate or discretionary permissions, he or she will not be able to benefit from automation.

Having the automation, essentially algorithms, in place is essential to generate the trading activity based on the mandated outcomes and allows advisers to be efficient at scale, which is vital for the success and sustainability of their business.

For an adviser firm, it’s vital to set clear parameters. This requires clarity on the house view of expected returns and risk tolerances of its investment models. There also needs to be effort put into anticipating market events, how they impact the client’s portfolio and what the correct remedial action should be.

Although this future requires a certain degree of positioning by both adviser firms and platform providers, the impact could be transformational. By exploiting technology, entirely new adviser business models will emerge and flourish to benefit many more clients.


Although this future requires a certain degree of positioning by both adviser firms and platform providers, the impact could be transformational"


The need for proper technological orchestration

Although having robust controls in place with the help of automation is critical to create the separation the regulator is looking for within an advisory model, the financial planning and investment management instructions still need to interact.

If an adviser is putting through a client transaction at the same time a rebalance is being instructed, it’s important the platform can action both instructions and that the client gets the best possible outcome.

There needs to be tight orchestration capabilities on the platform and this may be the single biggest challenge for platform providers. If a platform’s architecture doesn’t lend itself to segregating investment management functionality, this will be a challenge. For some, this will either mean focusing on the lower end, more commoditised clients. For others, it will mean a significant re-engineering job.

It’s all about having solid foundations. Standard Life Wrap began this journey five years ago when we put architectural separation in place and launched separate investment management functionality. Over the past five years, we have had more than £9 billion going into separated investment processes and growth is accelerating every year.

So although delineation between financial planning and investment management is important in terms of building a scalable business and managing risk, if the platform is not able to orchestrate instructions, other risks are created and client opportunities are missed.

Advisers have the chance now to get ahead

The delineation between financial planning and investment management will not happen overnight. There is, however, a definite trend and regulatory will. The message to advisers is, given this is the direction of travel, you have the chance now to get ahead.

The adviser firms which are prepared will be the firms which benefit most from this shift, rather than struggling to keep up with it.

These new technologies may challenge the very business models advisers are familiar with today but this is exactly why they will ultimately transform the way advice is delivered. Change can be challenging but, with the decline of paternalist solutions like DB pensions and a significant advice gap, this is what is required to deliver capacity to meet the needs of the people of the UK.

David Tiller is Head of UK Propositions at Standard Life.

Download The Future of Portfolio Management on Platforms , a lang cat white paper commissioned by Standard Life, now.

 

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.