Total assets in platform model portfolio services (MPS) topped £100bn in 2022. This segment of the market has been growing strongly in recent years and we expect this to continue.
There has been a long-term trend away from advisers running bespoke, in-house advisory portfolios for individual clients.
They have instead been outsourcing portfolio management, increasingly using discretionary management and adopting models. MPS ticks all these boxes.
MPS is a cost-effective solution for advisers looking to run portfolios that include investments from a broad range of asset managers.
It’s more efficient than running portfolios in-house and it’s cheaper than fully bespoke outsourced portfolio management. MPS also produces multiple lines on clients’ reporting, which looks better than the single line of a multi-asset fund.
CGT is deterring some advisers from using MPS in unwrapped accounts
That said, the MPS market faces some headwinds, aside from general market performance.
One of these is the fact MPS depends heavily on the platforms on which they are run. Wealth managers are limited by the investments available, so some end up running multiple model portfolios with differing investment options across multiple platforms.
Others restrict their MPS to investments that are common to all platforms. Many platforms are poor at dealing with exchange-traded instruments, meaning wealth managers tend to avoid using ETFs and investment trusts.
MPS can therefore tend to consist of relatively vanilla investments, with arguably too much weight given to liquidity. This raises the hackles of more traditional wealth managers who would like to include more esoteric investments in their portfolios.
Competing purely on performance is unwise, because it’s likely to attract fleeting business and, then, only in good years
That said, advisers often see vanilla investing as a positive feature of MPS rather than a drawback. Part of the appeal of MPS is that it deals well with the middle-of-the-road stuff. Many advisers prefer clients to hold any of their less mainstream investments outside of centralised investment propositions, recommending them on a client-by-client basis.
Meanwhile, capital gains tax (CGT), specifically the shrinking annual exempt amount, is deterring some advisers from using MPS in unwrapped accounts.
Wealth managers are typically blind to end investors’ tax affairs when they alter MPS asset allocation, switch investments and rebalance portfolios. Even relatively small unwrapped portfolios could be caught by CGT when only the first £3,000 of net gains will be free of tax.
Until now, advisers have generally advised relatively few investors with significant CGT liabilities on a regular basis, although these have been their wealthier clients. Now, almost any client with an unwrapped fund could find themselves with a CGT liability. Having to pay the tax could be an irritation. Omitting to report it could be a whole lot worse.
We predict MPS will reach around £200bn by 2026
A wholesale switch out of MPS for unwrapped accounts is unlikely and, in any case, would take a while to play out. Many clients are still sitting on paper losses from 2022 which they could offset against taxable gains.
Unwinding portfolios would also likely trigger gains, so advisers will be making any moves gingerly. However, we’re already seeing more interest in multi-asset funds for unwrapped investments and rising interest in offshore and onshore life assurance bonds.
A year ago, we predicted MPS would reach around £200bn by 2026, based on a continued growth rate of around 25% per year. While 2022 was noticeably lower than this thanks to market falls, we still expect strong growth over coming years and stand by our prediction.
As competition in the MPS market heats up, providers will be looking for ways to differentiate. They will be reluctant to focus solely on price, lest they find themselves in a race to the bottom.
Competing purely on performance is also unwise, because it’s likely to attract fleeting business and, then, only in good years. Broadening the investment universe and tackling CGT could provide more fruitful opportunities to stand out.
Richard Bradley is research director at Platforum. Platforum has recently published its annual report on the MPS market – UK Wealth Management: Platform MPS. For more information please get in touch.
