There has to be a commercial rationale for so many outsourced CIPs available with these obviously believing they can either add value, reduce cost or remove the hard work of creating and rebalancing portfolio ranges on platforms. If these reasons did not exist there would be no third-party industry.
That however does not mean that certain aspects of an in-house CIP can not be “bought in”, such as an Investment Manager to an Advisory Model Portfolio Service or the use of external researchers/validators to a discretionary Model Portfolio Service.
An in-house offering brings with it a certain cost control and avoids additional firms being required in the supply chain. This will also feel like a personalised service to the end-client who have already got confidence in the firm for advice, so no need to “sell” a third party’s service to them. The IFA firm will however need to weigh up the desire to do this “because they believe themselves to be investment specialists” against freeing up this valuable time to see more clients. It is after all the time with the client that the client values rather than the research that is done behind the scenes.
The advantage of discretionary portfolios over advisory portfolios is the permission to rebalance the portfolios without having to get client authority on every fund change. The disadvantage is having to obtain discretionary permissions. Obtaining discretionary permissions can take some time but could be worth the effort as it avoids having many hundreds of versions of advisory model portfolios, where clients must still return the authorities. Bear in mind also that performance will invariably differ from the master model as there will be a delay between sending out the switch authorities and receiving them back to action.
For both advisory and discretionary solutions a broad enough range of portfolios is required to meet the bulk of clients’ needs. Regardless of the risk profilers used, be it scores 1-5, 1-7, 1-10, most clients fit the corresponding 2-4, 2-6, or 3-8. As the owner of the proposition the adviser firm has to decide on investment style (active v. passive, ESG, Income, and combinations of all of these) plus whether or not to have a UK bias or go with Global weightings. Then of course it is selecting a platform (or several platforms) on which to operate, completing Due Diligence on these (and them on you including commercial viability), and training staff on how to build and maintain these models on the platforms. Rebalancing criteria then come into play:
Thereafter comes the creation of the models. It would be truly beneficial, for the adviser firm to have staff members with relevant industry investment qualifications, be that IMC, CFA (preferred if running own discretionary MPS) or their equivalents.
Creating a master model range requires deciding on the asset allocation, sub-asset allocation, fund research, master model build and then checking fund availability/share classes on the chosen platforms. The regulator expects firms to set up a formal investment committee with full terms of reference.
I hope the above will highlight some of the advantages as well as the disadvantages of an in-house offering.
The next in the series will be focussed on outsourcing CIPs, again looking at both advantages and disadvantages of doing so.
