The professionalism around portfolio management remains high up the regulatory agenda.
The most current regulation highlights how adviser’s client-led investment solutions need to adapt to meet the new suitability demands that the product governance part of MiFID II (PROD) requires.
PROD remains a grey area for many adviser firms as they work out how to segment their investment
PROD remains a grey area for many adviser firms as they work out how to segment their investment solutions, the main point being that their model portfolio propositions will need to be suitable for each client based on their needs, rather than based on the firm’s business model.
Although PROD should mean better advice for clients over the longer term, meeting the regulation will be time consuming initially. Under the rules, advisers will have to restate that it’s suitable for clients to stay invested in chosen funds if they are in an advisory portfolio, otherwise advisers will have to recommend the client moves into another model portfolio that they’ve carried out full due diligence on.
As a result of this newest capacity pressure, PROD may prove to be a driver for discretionary model portfolio adoption, whether with a third party or through discretionary permissions.
Spotlight on advisory and discretionary model portfolios
Since the introduction of RDR, MiFID II and now PROD, developing and delivering client-led investment solutions has never been more challenging and dependant on so many variables: a firm’s investment philosophy, cost and, of course, segmentation and clients’ individual needs.
Over the years, the move to centralisation within adviser firms has helped with efficiencies and ensured that clients are treated fairly and consistently but it has also led to accusations of ‘shoehorning’ where a ‘one size fits all’ approach is applied to clients who have similar but not identical needs.
In light of the PROD regulation, the question for advisers now is whether their model portfolios are better run in house with or without discretionary permissions or by being outsourced to a DFM.
All of these options have their own advantages and disadvantages and certainly one of the main challenges for advisers choosing to run portfolios in house is finding the time to give advice, as well as focusing on their portfolios where every action must be approved by the client. It’s a time-consuming process and can mean investment opportunities are missed. However, the advantages of advisory model portfolios are that they sustain good client relationships and clients can keep control if they are approving every action.
The advantages of discretionary management, meanwhile, are that advisers can focus on giving advice, with clients benefitting from immediate market opportunities, wider investment choice and specialist investment knowledge, such as ESG. The downside for the adviser is increased costs and giving up part of the client relationship. And for the client, there is less involvement over day-to-day investment decisions.
Whatever choice is made by the adviser, advances in platform technology are helping firms run their investment solutions in the most effective ways to suit the business, creating capacity and the ability to provide individual client outcomes at scale, a benefit that up until quite recently was just not possible.
The client and value for money
On the subject of increased costs, we know many advisers agree that outsourcing to a DFM can simplify their internal processes and although the client is benefitting from professional investment management, they do not always pass this cost on to the client.
One other issue to consider is the client’s need for value for money. A lot of cash is held under advisory model portfolios and clients expect to be paying their adviser to run their investment solutions for them. Clients may question what they are paying for if their fees are not only going towards advice but to an outsourced DFM for their investment solution.
But whether client-led investment solutions are kept in house or outsourced, with all the implications of each, what’s most important is that there is consistency in the client service.
Client-led investment solutions respond to a blend of approaches
With more regulation expected around portfolio management and with resource, capacity, time and risk all continuing to be factors of an adviser firm, advisers will need to keep re-examining their model portfolios to reflect these issues, and look at using a blend of approaches for their client-led investment solutions to meet the PROD rules.
If you’d like more information about your obligations under PROD, please take a look at our recently-published blog, Why PROD rules make it important to segment your target markets.
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.