The rise in 3rd party investment propositions – a prevailing trend

Despite more model portfolio providers entering the market and the prediction of demand from advisers plateauing, it seems that the requirement for greater transparency of charges from MiFID II has accelerated the trend for investment outsourcing. Using readymade third-party investment solutions, rather than running portfolios in-house has become increasingly popular amongst the adviser industry. As new regulatory practices have called for increasing transparency between the investor and fund manager; the requirements for AUM growth, staff recruitment, ongoing regulatory compliance, risk reduction and fees continue to consume the resources and time of the adviser industry. Outsourcing the investment proposition has relieved in-house responsibilities and allowed financial advisers to focus on true financial planning. In this year’s FE fundinfo adviser survey – Surfing the Wave - 57% of respondents said they use 3^rd parties to deliver specialised investment services.

Some have argued outsourcing is counterintuitive as 80% of adviser revenues come from investment business. The argument stands that if an adviser wholly or partly outsources services they’re contributing to another layer of cost for the investor that can be avoided by keeping it in house. However, the counterargument here is that the adviser can spend more time in front of the customer and focus on their financial planning propositions, which is where their skillset is most valued by investors. In addition, the sheer amount of man-hours required to run a truly whole of market investment proposition with the appropriate amount of due diligence is these days, beyond the reach of all but the largest IFA firms.

Which is perhaps why evidence continues to show that the demand for 3^rd party providers is increasing. The FE fundinfo Adviser survey has recorded a steady increase in the number of advisers using 3^rd party model portfolio services (MPS) over the past 3 years. Since 2018, the number of advisers outsourcing to 3^rd parties have increased on average of 6% per year.

A changing distribution model

The growing trend for outsourcing is freeing up adviser time and providing additional capacity. Advisers have more capacity to manage client relationships and focus on client acquisition and retention. These behavioural changes from advisers have triggered a chain response. Now that a larger portion of the market is controlled by MPS providers, fund managers need to be more vigilant to ensure that their distribution reach is not being compromised and pushed further away from individual investors.

It’s now more important than ever that providers are streamlining the distribution of their portfolios, and focussing on targeting key fund selectors through effective and efficient dissemination services that take advantage of large distribution networks.

A continuing trend?

There are now more MPS players in the market than ever before and more choice for advisers away from traditional fund selection. One of the advantages of pre-made model portfolios is that advisers must rely on a single provider for information they require for regulatory reporting rather than collecting information on individual funds.

According to the FE fundinfo Adviser Survey, only 30% of advisers felt necessary reporting figures such as ex post costs and target market assessments were made easily accessible by product providers on funds. Furthermore, another 30% thought it was hard to get accurate, complete and useful information from them. Advisers are still seeking better solutions to report underlying portfolio data that will provide transparency to the end investor.

So how can product providers improve the visibility and accessibility of their propositions and their underlying data?

FE Analytics currently allows fund selectors to choose from 50 leading MPS providers in the UK. It has been five years since the launch of FE fundinfo’s MPS Directory which was purpose-built to support adviser firms in meeting stringent client reporting requirements. Today, it is utilised by 1,300 adviser firms who seek out portfolio data and fund information, while offering MPS providers a unique opportunity to qualify, market and distribute their fund data to individual firms.

Take a look at some of the core benefits for financial advisers and MPS providers: