Consumer Protection May Spur Demand for Model Portfolios in the UK

October 6, 2023 — London

Adoption of model portfolios is increasing in the financial advisor community

Demand for model portfolios in the UK is growing as independent financial advisors continue the trend of outsourcing investment decisions to discretionary fund manager providers, according to the latest Cerulli Edge―Global Edition.

“Adoption of model portfolios accelerated after the Retail Distribution Review, which pushed increased transparency, and led financial advisors to focus on models and cost. The outsourcing trend is expected to accelerate as a result of Financial Conduct Authority’s recently introduced Consumer Duty Principle, which further increases transparency and consumer protection in retail financial services,” says Fabrizio Zumbo, director, European asset and wealth management research at Cerulli.

Model portfolios could also be a growth driver for exchange-traded funds (ETFs) and other passive products, with the ongoing need to reduce costs a key factor. In 2022, the number of passive managed portfolio offerings increased from 23% to 29% of all managed portfolios in the UK, while active peers declined from 61% to 54% and “blended” (using a mix of active and passive underlying holdings) increased from 15% to 17%.1

“Cost is one of the main drivers for this, but ETFs have grown in popularity, and the familiarity of and comfort with such products have also increased among investors. The level of specialization in the ETF market has also expanded substantially in the past few years, and the different products in the market can offer diversified exposures to a variety of asset classes, regions, sectors, and themes as well as benefit from increased liquidity and relatively low cost,” says Zumbo.

Model portfolios offer greater transparency and provide a ready-made solution that can embed diversification, rebalancing, and access to investment management expertise. Using this investment approach makes it easier to design a client-specific feature―such as a particular focus on environmental, social, and governance―than it is within a fund structure. Model portfolios offer a more sophisticated investment solution than a single multi-asset fund holding, without requiring a fully bespoke portfolio to be built for the client.

There is a vast range of model portfolio service providers in the market, covering different investment styles, risk levels, and costs. Their products are typically available on a platform or a range of platforms, making them easily accessible and simple to administer. One of the major benefits of a model portfolio service is that it provides advisors with a discretionary investment solution for the client while maintaining its role as the primary contact and advice point.

“Model portfolios offer clients a good level of transparency and they are now a popular choice on platforms, giving investors access to a variety of investment expertise. The fact that a growing number of model portfolio providers are incorporating ETFs in their portfolios is good news for end-investors as it means lower costs,” notes Zumbo.

1 Source: Morningstar

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Note to editors

These findings and more are from The Cerulli Edge―Global Edition, October 2023 Issue.

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