The rise of Model Portfolio Services (MPS) has been a standout trend in the UK financial advice and wealth management space. As the MPS tidal wave continues to sweep across the country, it is reshaping the advice landscape and reconfiguring portfolio management.
MPS solutions offer advisers ready-made, cost-efficient and transparent investment portfolios aligned to different client risk profiles. Their rapid growth is a function of advisers increasingly outsourcing investment management to discretionary fund managers (DFMs) to de-risk their businesses and spend more time with clients. This has been fuelled by multiple factors, including compliance pressures, the shift to low-cost investment solutions and the evolution of the adviser’s role towards financial planning and lifestyle coaching.
MPS solutions have achieved deep market penetration. Platform MPS assets have seen an annual growth rate of more than 25% since 2019, according to Platforum. A multitude of providers now vie for adviser business, with competition intensified by consolidation in the advice space. Tatton, Quilter, Timeline and Parmenion are among the largest MPS players.
The MPS assault on the advice space has even impacted UK capital markets. A report from The Investment Association partially attributes outflows from UK equities over recent years to the preference of MPS solutions for global equity strategies.
Winning the outsourcing race
The shift to outsourced investment solutions is an established trend, but why have MPS become the dominant outsourcing model, forging ahead of bespoke services and muti-asset funds in the race for assets?
A host of tailwinds have created a perfect storm for MPS. On the one hand, a succession of regulations stretching from the Retail Distribution Review (RDR) to the Consumer Duty have elevated the importance of transparency and consumer outcomes. MPS have also benefited from the rise of passive investments as advisers seek lower-cost strategies for clients. Another core advantage is the ability of these solutions to integrate with other components of the advice value chain. The major MPS solutions are available on most platforms – providing an extensive distribution infrastructure – and also integrate with most risk profiler solutions.
The director of a UK wealth management firm says consistency and transparency has been key to the success of MPS.
“MPS are ahead of other outsourcing models because you know what you’re getting,” he says. “Bespoke solutions have much greater variance in outcome depending upon who implements it and what process is used. I think the fact that MPS is standardised and one client is going to get exactly the same results as the other client appeals to financial advisers.”
Crucially, MPS also offer adviser clients very cost-effective portfolio management. Amid a race to the bottom on fees, some solutions now charge as little as 15-20 basis points.
The regulatory spotlight
Unsurprisingly, the rapid expansion of the MPS market has not gone unnoticed by the FCA. Earlier this year, the regulator announced it is conducting a review of the market to ensure MPS solutions are delivering good client outcomes in line with the Consumer Duty. It will also look for any conflicts of interest where vertically-integrated firms offer their own funds through MPS.
“I think the FCA review will focus on value for money, preventing miss-selling and making sure clients are getting an appropriate solution,” says the wealth management director.
Against this regulatory backdrop, MPS solutions are increasingly morphing from a product to a service. The service element has come into sharper focus with the emergence of MPS research and ratings firms that help advisers to compare solutions.
A faster switching process has also helped put the onus on service. If advisers are not happy with their solution, they can simply vote with their feet and move to another MPS provider. The ability to stand out on service will be a key differentiator amid concerns over growing commoditisation in a market where a large number of DFMs compete on price.
Evolution and personalisation
MPS solutions are evolving away from simple, off-the-shelf products. They increasingly offer a broader suite of investments, including climate transition strategies, and a wider array of investment vehicles, including active and passive ETFs and closed-ended investment trusts.
Some models now provide more personalised services aligned with end investor goals and life events such as house purchases and retirement. The evolution of this segment of the market towards more tailored solutions is blurring the line between MPS and bespoke for clients in certain wealth categories.
Despite this blurring around the edges, MPS and pure bespoke solutions remain distinct propositions. And bespoke will remain the most suitable option for certain adviser clients.
“For people with more complicated tax positions and larger portfolios with assets in different places, MPS is not so appropriate,” says the director of the wealth manager. “And if clients want very niche and specific investments then it doesn’t work in those circumstances.”
Holistic outsourcing
For advisers, it should not be a binary choice between MPS or bespoke discretionary services. These investment outsourcing solutions should co-exist and complement rather than conflict and compete. Advisers should adopt a holistic approach to outsourcing and consider bespoke, MPS and multi-asset for different clients or for the same clients as they enter different life stages.
Going forward, we will likely see more advisers establish co-manufacturing arrangements with DFMs. These tie-ups give advisers more control over investment strategy but allow them to outsource regulatory risk. They promise investment freedom and compliance peace of mind, but clarifying roles and responsibilities between both parties will be critical.
The future of MPS
Although the MPS market continues to expand, there are signs of slowing growth. Furthermore, MPS assets are now concentrated in the hands of a few dominant players which are generating profit margins far above their smaller rivals. These market dynamics will likely trigger consolidation in the sector, further strengthening the dominance of the leading players through economies of scale.
And while recent regulatory intervention is a nod to the size and influence of the sector, providers will face additional scrutiny and the prospect of new rules following the FCA review. Increased regulatory compliance will disproportionately impact smaller providers.
These competitive and regulatory pressures will no doubt spur innovation. MPS providers will increasingly offer blended solutions combining active and passive investments and public and private markets. Key to carving out a competitive edge will be the ability to construct solutions balancing personalisation with efficiency and cost with value, all while achieving good consumer outcomes.
Robot Portfolio Services?
With MPS solutions often at the cutting-edge of adviser technology, it will be interesting to see how AI impacts the sector. The wealth management director thinks AI will provide an efficiency tailwind.
“The MPS market has more to gain from AI than other outsourced options because MPS lends itself to automation in a way that a bespoke product certainly doesn’t,” he says. “I think with AI, the implementation of MPS could be done in a manner which would reduce costs further and reduce the admin burden for firms.”
But for now, he sees little chance of AI-powered Robot Portfolio Services replacing Model Portfolio Services.
“I see the benefits of AI initially and primarily in terms of the efficiency of the administration,” he adds. “I don’t have any information to suggest there’s going to be a shift in the near term so that AI actually impacts investment decisions or the way portfolios are managed.”
Will Roberts is a senior editor at CoreData Group, a global specialist financial services research and strategy consultancy. To find out more about our industry insights and research programmes, you can reach him at [email protected]