What's behind the growth of tailored investment solutions?

The demand for custom model portfolio services (MPS) has been growing rapidly since the start of the year, indicative of a wider industry trend toward tailored investment solutions.

Indeed, in our recent FE Fundinfo Financial Adviser Survey, nearly a third (31%) of advisers said they are already using these custom solutions, with 13% looking to adopt them within the next three years.

The rise in advisers who want a seat at the table makes sense. Consumer Duty brought an increased emphasis on personalisation and suitability, and a customised investment solution can be built to align as closely as possible with the client's needs. 

As advisers know their client's needs best, bringing this expertise to the fore has the potential to improve client outcomes.

Selecting a custom MPS raises questions: Is a firm better placed to meet its Consumer Duty obligations upon selecting a tailored investment? And, as a firm that ‘materially influences' the product determined by a co-manufacturer, how much more work is involved in taking care of enhanced responsibilities?

Communication and collaboration

Irrespective of a firm's status as a co-manufacturer or distributor, Consumer Duty rules require both the firm and the discretionary fund manager (DFM) to request information from each other to ensure they are delivering good customer outcomes. However, co-manufacturers might be expected to have a closer working relationship than in a distributor-manufacturer relationship. Working more closely together in a strategic partnership is likely to bring better client outcomes.

This means that advisers need to consider partnerships carefully. Barriers to information sharing between manufacturers and distributors or indeed co-manufacturers should raise a red flag. Both parties are expected to notify the Financial Conduct Authority (FCA) if the information requested is not forthcoming.

Aligning to the investor

Whichever route a firm decides is best for their clients – either an ‘off the shelf' discretionary MPS solution or a customised tailored solution – the FCA suggests firms consider how the manufacturer's target market aligns with their own assessment.

Before a distributor ‘distributes' a product or service, it will need to consider how the manufacturer's target market aligns with its own assessment of the needs, characteristics, and objectives of its own clients (Para 2.20 FG22/5: Final non-Handbook Guidance for firms on the Consumer Duty (Para 2.20)).

This is an area where we see clear benefits of a tailored investment solution. Where the manufacturer can understand and analyse the firm's target market assessment under a co-manufacturer arrangement, advisers and their clients can benefit from deeper alignment.

Investment philosophies

A custom investment solution may have the advantage of allowing an advice firm to change their investment philosophy. For example, a renewed focus on cost and charges or when a firm acquires or partners with a new adviser firm with a different approach to their centralised investment proposition, thus avoiding the need to change discretionary managers.

In the FE Fundinfo Financial Adviser Survey, advisers highlighted that asset allocation was an important factor when considering a custom solution.

This shows the benefits of a tailored MPS aligning with their risk profiling software or questionnaire, allowing for a more streamlined process. Saving time and bolstering risk processes are an essential part of what the DFM should bring into any relationship.

Since we started on the journey to offer a tailored MPS, we quickly saw a demand to help a wider range of firms than we initially anticipated, all with quite different needs. We now have multiple defined tailored investment services, each approached slightly differently from a regulatory perspective but each with a client-centric starting point and the important aspect of a custom solution – flexibility.

Reporting

Almost 61% of advisers said that clear and transparent client-friendly reporting documents were important, according to the survey. And this makes sense. What advisers put in front of their clients impacts their advice experience. But what's "friendly" for one segment of clients might be different from another.

The flexibility offered to advise firms through a tailored solution allows firms to build reporting suitable to their clients. We've found most firms enjoy designing their own factsheets and, thanks to our solid foundations, we have a wide array now in distribution, each one reflecting what each firm feels will be most relevant for their own clients.

Extra responsibilities?

Moving from an in-house advisory model where the firm is undertaking the rebalancing might be expected to save time, but the co-manufacturer requires closer collaboration with a DFM than for distributor-only agreements. But is this good or bad? Holding regular investment committees and product governance meetings with a DFM allows a firm more personalised attention and access to expertise than they might otherwise be able to enjoy.

This is prominent on advisers' DFM wish lists according to the survey, with 58% of advisers saying they would like access to the MPS providers' investment team.

Despite this, many firms we speak to are concerned that becoming a co-manufacturer will significantly increase their responsibilities under the duty – particularly smaller adviser firms that may have limited resources.

We know, that this is where a partner that offers a wide range of competencies and true flexibility is important.

The FCA requires that the party responsible for each task in a co-manufacture relationship is documented. At FE Investments, we work on this alongside our partner advisers, and then it forms part of a working mandate for our co-manufacturers and is reviewed on an ongoing basis.

Practically speaking, the responsibilities under co-manufacturer are an extension of those held as a distributor. However, depending on the firm's ongoing tasks, any additional responsibility varies based on how much the firm would like to influence the investment solution. For arrangements where the target market assessment is undertaken wholly by us, we find this means very little difference in the advice firm's task allocation.

Feedback from firms that have undertaken a co-manufacturing engagement with us consistently points out the time saved through integrating their investment solution into other aspects of the financial planning process – such as the risk profiling tools and selected strategic asset allocation.

What's best for the client

Whether an advice firm is interested in a tailored solution or not is ultimately a decision that is driven by what is right for its business and clients. Deciding to have a co-manufacturer arrangement could help strengthen an adviser firm's investment proposition, saving time, creating efficiencies, and de-risking. And with the right partner support, it could mean very little in terms of extra responsibilities – with the time saving created easily offsetting any additional work.

However a firm decides to work with a manufacturer, what is important is that roles and responsibilities are clearly defined and understood by all parties. At FE Investments, we look forward to collaborating closely and flexibly with our partner firms, embracing Consumer Duty, and empowering firms to deliver favourable client outcomes.

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This article first appeared in Professional Adviser on 12 June 2024