MPS is arguably the jewel in investment platforms’ crown. Technology allows the separation of specialist functions – advice, investment management, custody, execution and reporting – such that each component can be deal with in isolation by dedicated specialists.
This is manna from heaven for advisers in a highly regulated, value-focused, consumer duty-oriented world. Investment management is a huge undertaking requiring investment in systems, data, research, staff and regulatory permissions. It is entirely unrealistic for small advisory firms to be client and market focused at the same time.
Mutual fund offerings are, by nature, a one-size fits all, with substantial associated set-up and operating costs. They require complex documentation, multiple participants, seed funding and careful nurturing to get them to a size where they become cost-effective. Contrast that with zero documentation and zero cost for launching a model portfolio on platform; all that is required is a list of ISIN codes and percentages and it’s live.
This is why MPS is so flexible. DFMs are no longer restricted to standardised offerings but can offer multiple variations on a theme for near zero incremental cost. MPS also lends itself to mass customisation, with tailored portfolios being made available at an adviser or even family level.
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Most importantly of all, MPS leverages platform tech to deliver the benefits of scale directly to the end investor. This is the primary driver behind Sparrows Capital’s capped-fee pricing .
But this flexibility comes with its own issues. The largest, from a DFM’s perspective, is the problem of managing hundreds, and in some cases thousands, of model portfolios across, say, 15 platforms, many of which use proprietary technology with limited communication and reconciliation functionality and widely differing interfaces. Multiply 50 portfolios containing 10 instruments by 15 platforms and you get an idea of what is involved.
Little wonder NextWealth has reported in a recent whitepaper, Keeping MPS clients in focus, that current processes are inadequate to manage the volume and complexity of models across multiple platforms and that ostensibly simple processes, such as a portfolio rebalance, can take up to 100 hours .
There is a similar issue for DFMs in receiving data on assets under management and on client numbers from the platforms. Flat files, phantom information, transfer delays, manual processes and, in some cases, GDPR breaches abound. This inefficiency makes it near impossible for a DFM to have a clear, up-to-date picture of the deployment of its models, or to reconcile the spurious amount paid to it each month in the guise of DFM fees.
It’s not realistic to expect platforms to cooperate without some form of centralised industry initiative. The good news is that there is movement in that direction in the form of standards, enhanced platform tech and third-party solutions.
Criterion, a not-for-profit organisation linked to several large financial institutions, has been developing communication standards and protocols since 2022 and these are expected to gain traction and to provide a baseline framework for portfolio management and client data delivery. There are some rough edges, including a pricing policy which creates undesirable barriers to entry, but on the whole this development is likely to prove highly beneficial to MPS users.
Platform tech providers, such as FNZ, are uniquely positioned to deliver communication and functionality enhancements at the platform level and across platforms to support the needs of the DFM sector and its adviser clients.
At the same time, third party vendors – some home grown and some from mature MPS markets such as Australia – are looking to deliver robust MPS portfolio management functionality which will hugely increase the capacity of DFMs to design, maintain and support a far wider range of model portfolios.
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We have heard little so far from the FCA on this subject but, as MPS grows in importance and the operational risks increase exponentially, we may expect the regulator’s Platform Supervision Strategy to focus more heavily. This should provide further stimulus for progress.
There’s a way to go still, and robust solutions depend on collaboration and on commonality of interest to improve efficiency, reduce risk and improve value to the end client. The direction of travel has been established, and consumer duty provides a useful tailwind.
So what does this mean for the MPS market? To some extent that depends on our new government. One, fairly minor, disadvantage of MPS relative to funds is the ability of the latter to defer capital gains resulting from portfolio changes and rebalancing. We have already seen reductions in CGT allowance, and we may see further changes to the CGT regime, pushing some advisers away from MPS and towards mutual funds.
Tax aside, we expect all discretionary managers to embrace MPS as technology, standards and operational processes improve. This will encompass the IFA market, wealth management and the traditional bespoke providers, with custody moving from traditional private banks to platform solutions. Mass customisation is the direction of travel, with tailored solutions available to firms and even at client level.
Mark Northway is an investment manager at Sparrows Capital
