Amid a backdrop of increasing fee pressures and significant regulatory shifts, a key trend of the last decade has been the growth in popularity of both multi-asset funds (MAF) and managed portfolio solutions (MPS).
In particular, the introduction of the FCA’s Consumer Duty last year has placed more attention on both types of solutions, with the regulation stipulating that advisers must review their centralised investment propositions (CIPs) to ensure that clients are receiving the best value possible based on individual objectives and requirements.
As a result, with both MAF and MPS regarded as cost-effective outsourced investment solutions, this has driven significant demand in the marketplace. Post RDR came the initial wave of outsourced investment solutions. In the last decade we have increasingly seen financial planner firms acquire DFM permissions to provide their own investment solution in the form of an MPS or partner with DFMs and, with the recent changes to capital gains tax legislation, we see more activity for wrapped solutions such as MAF.
Traditionally, wealth managers provide discretionary MPS and asset managers provide MAF and now both asset and wealth managers are increasingly providing both.
Indeed, the MAF vs MPS conversation has become one of the most significant debates within the investment industry, alongside the likes of active versus passive, growth versus value and alpha generation versus risk management.
However, if we are true to meeting the spirit of the FCA’s Consumer Duty regulation, it is clear there is not a holistic ‘one-size-fits-all’ correct answer and the conversation that needs to be had is much more nuanced.
The rise of MPS
In terms of the recent developments, it has widely been reported that MPS have taken the lead over MAF with regards to attracting new client money.
A recent report from NextWealth highlighted that MPS have experienced particularly strong growth in the UK over the six months to the end of Q1 2024, with the products attracting 31% of new client money, compared with MAF which attracted around 25%.
Furthermore, this is not anticipated to be a short-term ‘fad’ either, with Fundscape projecting that client assets within MPS will grow to about £554bn by 2028.
Traditionally, MPS were sold to advisers’ mid-range clients as more sophisticated solutions than MAF with investment transparency and “look through” platform reporting providing clients with confirm that they are truly in a diversified portfolio, as well as the enhanced servicing managers provide to both the adviser firm and the end client.
This can come in the form of additional white labelled and or personalised portfolio reporting from the investment manager, as well as the investment manager supporting advice firms by attending their investment committees to report the portfolio and market performance.
MPS were traditionally seen as more expensive with an additional DFM fee, but with the removal of VAT and greater transparency on the total cost of the MPS in the past five years, together with the rise of passive MPS, this is not always the case.
However, transacting MPS on platforms, especially where they hold listed instruments such as ETFs, can be subject to dealing charge. This can become significantly challenging for smaller investments or regular contributions and especially in a General Investment Account (GIA) with the recent announcements on CGT allowances decreasing.
The case for multi-asset
While MPS have been the talk of the industry, the longstanding option of MAF should not be overlooked.
As an investment solution, MAF can allow for more investment sophistication, such as the use of wider investment and asset classes and tools such as hedging and derivatives. There is less dependency on the platform and more flexibility for the investment manager to adjust asset allocation to suit the market conditions.
In the current landscape, with inflation still proving a factor, with a degree of uncertainty around the interest rate environment, many sophisticated managers are looking at alternative asset classes available to them to help with downside protection, generate returns and help diversification.
As all the investments happen within the wrapper, there is also a consistency in investment outcome regardless of platform. Moving clients from one platform to another is much easier for one MAF (as one investment solution) rather than a MPS which can have several investment strategies that may not all be available on the platform.
If the fund manager running the MAF has the advantage of attracting large assets, these economies of scale can often be passed back to the investor through a reduction in price and much encouraged by the regulator in its Value Assessment requirements.
Finally, in the case of outsourcing a simple asset allocation which uses passive investment fulfilment, it is hard to beat the pricing of a MAF for its return on pure investment outcome.
Conclusion
The investment industry is becoming more and more personalised, with investment solutions that are increasingly tailored for each client’s objectives – and this is a good thing. There is more choice in the marketplace than there has ever been, and while that can be extremely daunting, with proper guidance and advice clients can be steered towards the most suitable option for their requirements. That was a primary objective when Consumer Duty was introduced over 12 months ago, and it is particularly true with regards to the MAF versus MPS debate.
Ultimately, it is the responsibility (or ‘duty’) of investment managers to listen to the wants and needs of their clients, with the aim of providing them with the optimum solution.
In their latest multi-asset distribution report, NextWealth has found almost 80% of advisers who use discretionary MPS also use MAF. We therefore welcome the use of both MPS and MAF rather than one or another, and we embrace the debate that continues to drive transparency and knowledge on both solutions.
Smera Ashraf is head of global wealth – UK at Aviva Investors
