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FCA platform study: seven model portfolio objections

After talking to thousands of consumers, the city watchdog has identified a number of issues with model portfolios in its platform study

The Financial Conduct Authority has relased its much-anticipated interim report on the platform market. 

A large portion of the study, which was based on consumer research conducted between October 2017 and April 2018, was dedicated to model portfolio terminonlogy and language used to define risk. The  watchdog suggested the market may need to be better regulated. 

The regulator also found in its study that the level of fees charged varied widely, with higher costs associated with worse outcomes.

The FCA's findings come after research from Wealth Manager and sister title New Model Adviser earlier this year found wildly varying strategies with desginated risk-bucket categories. 

The research took in the views of more than 3,000 platform customers on both the advised and non-advised side of the fence. 

 

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The Financial Conduct Authority has relased its much-anticipated interim report on the platform market. 

A large portion of the study, which was based on consumer research conducted between October 2017 and April 2018, was dedicated to model portfolio terminonlogy and language used to define risk. The  watchdog suggested the market may need to be better regulated. 

The regulator also found in its study that the level of fees charged varied widely, with higher costs associated with worse outcomes.

The FCA's findings come after research from Wealth Manager and sister title New Model Adviser earlier this year found wildly varying strategies with desginated risk-bucket categories. 

The research took in the views of more than 3,000 platform customers on both the advised and non-advised side of the fence. 

 

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The consumers were split into several profiles, including:

Controllers

Controllers are some of the most knowledgeable and experienced investors. Predominantly non-advised, they are highly engaged and undertake their own research into their platform and product decisions.

Choice of platform is driven by the range of investment options and the charges applied, and either of these could lead controllers to switch to, or begin investing with, a new platform.

Indeed, controllers use more platforms than any other segment, and are happy to pick and choose different options for their specific benefits.

Hesitants

Hesitants are out of their comfort zone. They are less knowledgeable, less engaged and more risk averse than the other predominantly non-advised segments.

Despite this, the majority have no relationship with an adviser and are making their own decisions. Less active than other segments, many no longer contribute to their investments, instead hoping for positive return on what they have.

Hesitants are unlikely to switch platforms away from what they know, despite the possibility of a better fit elsewhere.

 

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The FCA found relatively few non-advised respondents in the sample (17%) are using model portfolios on platforms, given the preference for fund picking. 

They are younger than fund pickers, less affluent and unsurprisingly profile at the lower risk, lower confidence end of the spectrum. 

Advised customers were asked more in-depth questions about model portfolios in the qualitative research, where it was apparent there was a lower familiarity and recognition of the concept (compared to non-advised respondents), with the vast majority assuming advisers are picking funds and creating bespoke portfolios. 

'When probed, respondents are not clear whether they are in a model portfolio (created by the platform or advice firm), a packaged fund solution (e.g. a multi manager fund) or a bespoke portfolio created by their adviser,' the FCA said. 

'They are outsourcing this to their adviser and have no great need or desire for further clarity on this.'

The regulator published some of these consumer views in the study.  

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One non-advised controller said: 

They have several packaged funds which I see as an extra layer of admin and charges so no thanks!

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Meanwhile a non-advised hesitant outlined why he used model portfolios: 

Because I have chosen my funds I might look at them every 6 months. The whole point of having managed funds is that I don’t have to keep checking them

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Another non-advised hesitant said: 

There were three different arrangements, high, medium and low risk and I chose the middle one… it was xxx pre-packaged, easy investment management as not having to make many decisions

 

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Overall the FCA's qualitative research highlighted seven specific objections to using model portfolios. 

 

 

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1: Lack of flexibility 

'No choice of funds or ability to switch funds.' 

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2: Pigeon-holed

'May be put in to a risk profile or asset allocation that doesn’t actually suit your needs.' 

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3: Lack of enjoyment

'Given the pleasure derived from fund picking amongst the hobbyists in the sample, model portfolios are seen to remove that element from investing.' 

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4: Distance from the investment

'Sense that as an investor you become too distant from the activity, buying a product rather than an experience.' 

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5: Price

'Perception that an additional layer of management charge will be applied.' 

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6: Clarity

'Not clear enough how underlying funds within the portfolio are chosen, with some suspicion of vested interests of those constructing them.' 

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7: Lack of need

'Perception that as an experienced investor, one could do just as well as those in charge of the model portfolios.' 

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