Demand for Model Portfolios Is Set To Continue Growing in the UK
June 6, 2022 — London
The trend raises questions as to the long-term future of mutual funds
The use of model portfolios by wealth managers in the UK is set to increase over the next two years, according to the latest The Cerulli Edge―Global Edition.
Almost half (46%) of UK wealth managers expect to use model portfolios more extensively over the next 12 to 24 months, compared to just 2% that plan to decrease their use over the period. Currently, only 14% of survey respondents do not use model portfolios for their clients.
The research shows that the search for greater efficiency is one of the main drivers of increasing adoption of model portfolios in the UK wealth management space, with advice firms turning to external solutions that enable them to focus on “core” financial planning rather than investment management.
“The increased use of model portfolios, from an advisor perspective, is the simplification of propositions and business, allowing for greater efficiencies and scalable client management—and ultimately, cost reduction,” says Fabrizio Zumbo, director, European asset and wealth management research at Cerulli Associates. “Advisors can also ensure that their clients are invested in line with the house view, creating greater consistency of client outcomes.”
Commercial considerations are also impacting demand for model portfolios. Historically, multimanager propositions typically resulted in higher fees. Managers started to build model portfolios with exchange-traded funds (ETFs) that brought down the cost of investing in a whole-portfolio context and gave investors access to diversified market exposure at a lower cost. In addition, regulations have pushed operating costs up for discretionary managers while fees are under downward pressure. For example, the Financial Conduct Authority’s guidance on client suitability in centralized investment propositions has increased demand for outsourced investment solutions that are linked to a client’s investment profile.
When it comes to portfolio construction methods, altering an in-house model according to clients’ needs is the most common approach, followed by using models developed by a third party and altered as required.
“The ability to create a specific index for a fraction of what it would have cost 10 to 15 years ago has prompted a debate as to whether greater use of model portfolios could signal the beginning of the end for mutual funds,” notes Zumbo.
One view is that model portfolios are complementary to mutual funds rather than a replacement for them; asset allocation and manager selection are key features of model portfolio services and will drive flows toward mutual funds. Also, mutual funds have a different level of flexibility and access to the widest investment universe. Similarly, decisions are implemented much more quickly—real-time, intraday decision-making compared to the typical quarterly rebalance of a model portfolio (although underlying managers could be trading daily, rebalancing, and making changes without creating capital gains tax liabilities). The opposing view is that the cost considerations will continue to drive the agenda and contribute to a decline in mutual funds. However, the UK platform market, which is leading the way in terms of offering discretionary services, has not kept up with the ability to use ETFs from a technology perspective.
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