Managed portfolio services (MPSs) are hard to compare, have unsustainably high charges, and use outdated labelling. So say advisers and investment experts who reacted to our analysis of the sector.
Last week we published our first foray into comparing MPSs. We wanted to find out what they offer, how they perform, and what they charge.
The task was daunting. It took weeks to put together, and providers were still emailing us back with extra comments and clarifications on the day we published it online. We did not get everything right, but it was a start. And it will hopefully trigger more debate about the strengths and weaknesses of MPSs among advisers.
We looked at the portfolios of 10 MPS providers. Our research covered portfolios that fall within the Asset Risk Consultants (ARC) Cautious, Balanced and Steady Growth categories.
Our research highlighted a big problem for advisers was portfolio labels. A portfolio labelled as balanced, for example, might not necessarily fall into the ARC balanced category of 35%-55% equity exposure. Take Quilter Cheviot: both its cautious and conservative portfolios needed to be placed in the cautious bucket according to ARC. The Quilter Cheviot balanced portfolio ended up in the growth bucket.
What’s in a name?
Graham Bentley, managing director of consultancy gbi2, thinks this labelling issue shows MPSs are not reaching the standards of clarity expected elsewhere. ‘Complaints in 2010 and the Financial Services Authority’s Assessing Suitability paper in 2011 made it clear fund names like “cautious” should be replaced by more transparent descriptions,’ Bentley said.
‘What’s the difference between cautious, conservative and growth? What matters is the equity exposure. This led the Association of British Insurers and Investment Management Association to drop subjective names for mixed asset sectors, and instead use equity proportions to describe potential risk. Putting these portfolios into buckets according to equity content is the right thing to do.’
Adviser Keith Churchouse, director of Guildford-based Chapters Financial, said his firm recently conducted a review of MPSs. The firm decided not to place any business with an MPS, and his conclusions will not make easy reading for MPS providers.
‘I think we can achieve what they are trying to achieve but at lower cost,’ said Churchouse. ‘Some providers want to push a lower value product on higher value clients. They are trying to polish up a Mondeo into the BMW it never was.’
For Abraham Okusanya, director of research agency FinalytiQ, cost is king. He said it was ‘great to see the costs laid out’ by New Model Adviser®’s research. Okusanya believes the ‘vast majority’ of MPSs would underperform low-cost ‘plain vanillas’, such as the Vanguard LifeStrategy range.
‘Costs for MPSs are typically over 1%. Add platform and adviser charges to that and you get close to 2.5%,’ he said. ‘And that’s before transaction costs, as required by Mifid II. Advisers must disclose this cost, year in year out, in pounds and pennies; I don’t see how this level of cost survives.’
Bentley contrasted choosing an MPS with a multi-asset fund. ‘Why are model portfolios less accessible and transparent than multi-asset funds? Is the discretionary fund manager exhibiting more skill than a multi-asset fund manager? Is it as tax efficient as a multi-asset fund? How easy is it to access performance of a model portfolio versus that of a multi-asset fund?
‘Why is model portfolio performance so often quoted before fees or after custody costs? And why wait for a magazine to show you performance analysis rather than just being able to look it up on a free-to-air performance table?’
Hard to compare
Churchouse’s conclusion was MPSs were ‘not at all easy to compare’. Not only did he find providers’ offerings ‘needlessly complicated’ but ‘they all come at it from very different directions and all had a different solution to the same problem’.
Many advice firms may have recently hitched their wagon to an MPS provider, and perhaps have compelling reasons to have done so.
But these early conclusions place the bar pretty high in terms of justifying why it is better than the alternatives.
View our MPS findings in full here.