In its interim report, the regulator argued mismatched labels could be encouraging investors to make false comparisons between products or to invest in portfolios with a different risk level than they might expect.
Mike Barrett, consulting director at The Lang Cat, says using monikers like ‘cautious’ and ‘aggressive’ is a “dangerously naïve” way to label portfolios because these terms are so subjective.
“Your definition of cautious will be to grab a second parachute when you jump out of an airplane; mine is that I would never ever consider jumping out of a plane in the first place,” Barrett says.
When breaking down portfolios by asset allocation, the regulator found “inconsistency in the risk level” across all naming conventions but noted this was especially pronounced in portfolios with medium and high-risk labels.
Fixed income allocation in ‘moderate’ or ‘balanced’ portfolios, where the name implies medium risk, varied substantially – from less than 5% exposure in some mandates to over 60% in others, according to the report.
Equity allocation was similarly varied.
A fifth (20%) of ‘medium-risk’ portfolios the regulator looked at had profiles that more closely resembled those of ‘low-risk’ portfolios.
Impossible comparisons
Barrett says a much bigger issue is ensuring these products have greater transparency around expected outcome, costs and risk.
Comparing model portfolios is “very challenging to the point of almost being impossible” for both advisers and clients, he says.
Advisers who want to compare portfolios on behalf of their clients generally have to approach each discretionary manager individually for data on charges, performance and asset allocation, which he says is “unrealistic from a time perspective”.
“Realistically, on the advice side that isn’t going to happen and on the consumer side it is certainly not going to happen. There is no place where consumers can get hold of that data.”
Constant challenge
Andrew Glessing, director and head of compliance at Alpha FMC and former manager at FCA-predecessor the Financial Services Authority, doesn’t think it is fair to single out model portfolios alone for labelling issues.
But given the meteoric rise of the platform industry, he says ensuring the labels match the goods will remain a constant challenge for players in the space.
“As the world has become more digital and distribution has moved on, particularly in the context of platforms where you see direct to consumer (D2C) and business to business (B2B) offerings, the FCA would welcome the popularity of platforms and that choice that is now available to consumers,” says Glessing.
“But what comes with that is a higher need to make sure the labels work particularly if the solutions or products are becoming more sophisticated themselves.”
Glessing says it is in the interest of asset managers to get the labelling right because “they want their products to be properly understood and well-marketed”.
Standardised labels not the solution
Barrett does not think that creating more standardised risk labels for model portfolios is the solution to help consumers and advisers be able to better compare model portfolios.
He thinks bringing in standardised labels or even regulating how portfolios should be structured would be “a massive, massive step backwards”.
Clive Waller, managing director at CWC Research, similarly believes that over-regulation is not beneficial to providers, advisers or the end consumer and will create too much convergence between products.
“My personal view is let the customer beware,” he says. “Investment is a risky business and we’ll give you access to lots of information. Not try to proscribe everything because it is just not possible.”
Barrett takes a similar view, arguing there should be standardisation around disclosures of charges and risk and how this information is presented to consumers.
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