The model portfolio services (MPS) market is growing rapidly. It has morphed from niche to mainstream and with that growth has come complexity, competition and, most importantly, opportunity. For financial advisers, the question is no longer whether to use MPS but how to use it strategically, and that is where co-manufacturing comes in.
If we start with the basics, co-manufacturing is defined by the FCA’s PROD legislation as the involvement of any party in the manufacture of a financial product or service. You can be an adviser designing your own investment models with the use of risk-profiling tools, or an asset allocation provider licensing models to a DFM, and in both cases you are a co-manufacturer. The only regulatory requirement is to have a written agreement that clearly sets out who does what. Obviously the greater the impact on consumer outcomes, the more important that co-manufacturing arrangement is.
But the real story isn’t regulatory, it is strategic. For advisers, co-manufacturing is about taking control of your investment proposition. It is about aligning your solutions with your client base, your brand and your beliefs. And it is about moving from being a price taker to a price setter.
At Elston, we have been championing co-manufacturing of adviser-defined Custom MPS mandates since 2018. We have helped firms design custom or tailored strategies that reflect and match to their target market. We have built solutions that are scalable, cost-effective, and platform-agnostic. (We define “bespoke” as being bespoke to an individual so not relevant in MPS space).
As co-manufacturing has extended its reach into the market, it has been adopted by advisers in a variety of different ways with different contractual arrangements resulting in fundamental alignments or misalignments of manager, adviser and consumer interests. We see three different co-manufacturing models: the good, the bad and the ugly.
The good
The good is open architecture. The adviser defines the strategy – the number of risk profiles, the asset allocation framework, the fund selection framework and the investment manager builds those models to order to align to the mandate. This was our original concept borrowed from the institutional market. If the investment manager doesn’t deliver on performance relative to objectives and constraints or value for money, the adviser can fire them. Simple. The adviser retains control, flexibility, and alignment.
The bad
The bad is captive arrangements. These often involve joint ventures. It might sound good to start with (value is of course created), but the adviser is locked in. You want to change provider? Tough. You’re tied to the JV. That’s not independence – it’s dependency. And it undermines your ability to act in your clients’ best interests. Worse still, it creates a conflict: advisers are incentivised to recommend a solution not because it is best for the client, but because it is best for your (and most likely your JV provider’s) bottom line.
Such structures may ultimately reduce the business value of the adviser firm, as the presence of a joint venture could be perceived negatively by a potential acquiring company. Keeping with the institutional parallel, when pension trustees appoint a manager, they don’t set up a JV – it would be mad to give an investment manager partial ownership of scheme membership. Advisers should think no differently.
The ugly
The ugly is fee-sharing. It is banned in the fund world since RDR, and rightly so. Why should MPS be any different? We believe this practice is contrary to RDR and will be scrutinised in the upcoming FCA. If you are an advice firm receiving payments from an MPS provider for no real service you are not independent, you are conflicted. And both the adviser firm and MPS provider are taking a significant business risk. Consumer Duty closed off any grey areas around fee sharing within co-manufacturing arrangements.
So what is the alternative?
It is what we call insourcing. As an adviser firm, you retain your investment strategy, your philosophy, your brand. But you bring in a strategic partner to help you deliver and implement it. They become your insourced research team, your implementation partner, your co-manufacturer. You stay in control. You set the direction. And you retain the customer lifetime value.
This isn’t just theory, it is happening. The largest advice firms are setting up their own DFMs. Mid-sized firms are building custom MPS ranges. And even smaller firms are white-labelling ready-made, off-the-shelf solutions.
Why does this matter?
Because the value chain is shifting. The old model – advice fee, platform charge, service fee, fund fee – is pear-shaped. The adviser takes the risk, but the manufacturer and fund providers takes the reward. The new model flips that. The adviser owns the client relationship, controls the proposition, and captures the value. Everyone else is just plumbing to support that adviser firm. That is how you advisers build a scalable, defensible and valuable business.
After all, clients aren’t asking you to pick funds or pick models. They are asking you to manage their money, to deliver outcomes, to solve problems. Co-manufacturing lets you do that. It lets you build solutions that reflect your clients’ needs, not someone else’s fund or model marketing strategy.
So what comes next?
The FCA is reviewing the MPS market. We have made our suggestions: standardised cost disclosure, clarity on co-manufacturing roles and a crackdown on fee-sharing. We want MPS to be held to the same standards as funds because that’s what clients deserve.
In the meantime, advisers have a choice. You can outsource everything and hope for the best. You can build everything in-house and take on the risk. Or you can co-manufacture – partner with the right people, retain control and deliver value for your clients.
Co-manufacturing isn’t just a buzzword. It’s a blueprint for the future of advice. And the firms that embrace it will be the likely winners.
By Henry Cobbe, Director & Head of Research, Elston Consulting
Image from Freepik.com
