Custom MPS and how it has come about
Custom MPS (model portfolio service) is when advisers have a role in shaping and overseeing the portfolios they make available to their clients. Custom portfolios are becoming increasingly popular within the adviser community for three reasons:
- Firstly, the introduction of the Product Governance Rules required that investment solutions are appropriate for a particular target market.
- Secondly, advisers want to differentiate their solution from a range of similar ready-made solutions.
- Finally, many of the larger traditional managers failed to act as bonds plunged with inflation and rising interest rates. Advisers understandably want to have more say.
The history of custom
As one of the pioneers of adviser-defined custom portfolios in 2018, we found ourselves drawing on our experience of working on investment governance frameworks for the workplace pensions market.
With the advent of PROD, advisers increasingly had to think about a robust governance framework for their selected mandate and to review, and if necessary, replace the managers of that mandate.
Who might custom MPS appeal to?
Custom MPS can serve various different types of advisers. We see these coalescing into three broad groups.
Firms with a focus on implementation
These already have a strong investment philosophy, a solid investment process, and a track record that rivals larger DFMs (discretionary fund managers). For them, custom MPS offers an opportunity to continue with their approach, while benefitting from more professional support in managing, implementing, and overseeing the portfolios.
Firms focused on strategy
For these advisers, custom MPS is a way to gradually take on more responsibility within the investment process, eventually allowing them to obtain the necessary permissions to manage more of the value chain themselves.
Differentiation
Custom MPS affords advisers a way of differentiating themselves from DFMs that have larger marketing budgets and, in some cases, a financial planning operation that indirectly competes with the adviser firm’s own offering.
What ‘customisation’ may look like
If advisers only use generic portfolios from DFMs and multi-asset fund providers, advisers are restricted to those managers’ beliefs, rather than their own.
With custom, there are several ways an adviser can ask the manager to tailor portfolios. For example, the choice of strategic asset allocation framework, whether to use a static or dynamic approach to asset allocation, the choice between active or index-tracking funds (or a combination) for implementation, the inclusion (or not) of alternatives, the stance on bond portfolio management, and budget considerations or fee caps.
For advisers, ensuring that they get ‘true custom’ is important. Some providers use the term custom rather loosely. What may in fact be described as custom is simply a white-labelled version of generic ready-made portfolios (perhaps with slight modifications), or a set-up that evolves into a standard model over time.
One thing it is important to distinguish between is co-manufacturing and co-branding. For the former, the adviser has a significant role in defining the custom mandate, with their input shaping the design and operation of the portfolio. For the latter, the adviser is essentially white-labelling or co-branding an existing DFM’s portfolio range. It is crucial to understand who is actually managing the portfolios in these cases, and the respective roles and responsibilities.
Potential commercial conflicts
There is a view in the market that it would be appropriate for a DFM to pay advisers for their input into the design of a custom mandate, but we believe this approach contradicts principles established by RDR and Consumer Duty regulations.
Other MPS providers may offer co-manufacturing arrangements in exchange for an equity stake in an adviser’s business. While this might hold some appeal for both parties, it is hard to imagine how an adviser firm could disentangle itself from a DFM by which it was partly owned.
The key to avoiding potential commercial conflict for advisers looking to adopt custom MPS is to ensure they retain control over the appointment of the manager and are not relegated to a subordinate role by a larger DFM partner.
Summary
Custom MPS solutions are a significant innovation, benefiting both advisers and their clients. Increased competition in this space is positive, but it is important that this growth does not compromise the quality or integrity of what is being offered.
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