Model Portfolios and Total Cost of Ownership

Are off-the-shelf model portfolios getting more than their own fair share of fees? 

The use of model portfolios have become common place within advice firms, with many choosing to outsource or use off-the-shelf model portfolios, typically provided by DFMs and research firms like Morningstar. And by off-the-shelf, I mean pre-constructed risk -rated portfolios, rather than bespoke discretionary management.

My bug bear is how  these model portfolios providers tend to charge. Given that advisers fees/charging are coming under increasing pressure both from the regulator and clients, I think it’s time we put model portfolio costs under intense scrutiny as well. 

My question is why are model portfolios charged on percentage basis? The fact is what model portfolio providers are really offering is their intellectual property, specifically risk mapping, asset allocation and fund selection. Why is that charged as a percentage of client’s asset under management? In most cases, the risk lie with the adviser to ensure that clients are put in the right portfolio, depending on their risk profile and so the risk to the model portfolio provider is minimal.

One key issue here is the Total Cost of Ownership to the client.  Using outsourced model portfolio may add between 25bps to 50bps to client portfolio. Add to that the platform charge (30bps – 50bps), the underlying fund TER/OCF (75pbs – 100bps) and the adviser’s fees (75bps – 100bps), the total cost of ownership may be well in excess of 3%pa! Compare that to equity risk premium which historically has been around 4%pa (Well, 3.47% between 1977 to 2012, to be exact)

Does it not bother anyone that clients are paying 3%pa, so we could help them capture 4%pa real return? And what’s the implication of this for advisers’ long term relationship with clients? In these days where advisers are looking to build life-long relationship with clients, it may be a while but soon enough clients will figure out that they are paying so much, just to stand still. 

The other way to look at this is, if for instance as firm you have £100M fund under advice and you hand 30bps of that to a model portfolio provider, that’s £300K pa of your clients’ money! Why not bring in the expertise in-house? I’m sure you could hire a good peer of hands for a lot less than that. Off course another alternative for firms is to run their own in-house model portfolio, perhaps with support from external party and we work with many firms to support the research process.

Finally, this is one area that adviser can use economy of scale. If you choose to outsource or use off shelf model portfolio, why not simply agree a fixed fee with the firm, where the provider design the solution, charges the adviser firm for it and then can pass the cost on to their clients? The more client you have in the model, the less the unit cost per clients!

I think as pressure mounts on advisers to demonstrate that they are giving value for money, the least we can do is expect the same of DFMs and other model portfolio providers.


Abraham Okusanya
Abraham is the founder of FinalytiQ, a research consultancy for platforms, asset managers, and advisory firms. Recognised as one of the country’s leading experts in retirement income, platforms and investment propositions, Abraham has authored several papers on these subjects and delivered talks to the Personal Finance Society, The FCA and several conferences across the country.

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