With the new Consumer Duty regime advisers face more pressure than ever to ensure they are picking the best possible products and solutions for clients.
In the latest of Professional Advisers' Working Lunch series, experts from Schroders explained that when it comes to outsourcing both multi-asset funds and model portfolio services (MPS) have a place, but the client profiles are different.
There are fundamental differences between MPS and multi-asset solutions, they say, which are increasing in popularity as advisers look to outsource.
Multi-asset solutions are more appropriate for income clients, while model portfolio solutions are better placed for growth clients, head of UK intermediary solutions Gillian Hepburn and chief investment officer Alex Funk said.
Funk explained that while a multi-asset portfolio involves purchasing one unit, a model portfolio means purchasing multiple units. This difference becomes "really important" when "managing income" for clients.
"Model portfolios are challenging in that each of the underlying funds has a unit with a different ex dividend date that needs to be monitored," he said. "This mean income distribution can be lumpy or be missed because of fees and rebalancing".
For income clients a multi-asset fund is "more efficient" because the fund manager can control the buying and selling of the funds and smooth income through managing dividend and coupon payments.
Hepburn explained that since income has been such a challenge for clients over the past number of years this is something Schroders have been paying close attention to.
"Up until last year we had a MPS and a multi-asset fund for income," she said. "But we took the bold step to close the MPS and move the clients to the multi-asset fund because it would be a better outcome".
The Schroders duo also noted the importance of putting a solution in the right tax wrapper.
Unwrapped solutions, like MPS, can be challenging from a capital gains tax perspective and so it is important to ensure they are held in an ISA or a self-invested personal pension.
Schroders said about 70% of their MPSs is held in one of these tax wrappers.
Hepburn concluded the segment of the webinar by explaining neither product is "better than the other".
"It is about the client outcome you are trying to achieve," she said.
Impact of Consumer Duty on MPS
Hepburn and Funk also noted the importance Consumer Duty will have on leveling the playing field between MPS and multi-asset funds from a regulatory perspective.
"Model portfolios have not been regulated entities," explained Hepburn. "They exist purely by benefit of platform technology. As a result of Consumer Duty they are under regulation."
She said the regulation will require providers, such as Schroders, to provide a target market document and a fair value assessment.
Multi-asset funds have already fallen within the assessment of value (AoV) regime, which requires asset managers to consider seven prescribed criteria to assess the value of their funds and publish the results annually.
AoVs were introduced in 2019 and have evolved over the past number of years with providers refining them, receiving feedback and learning from their peers.
Hepburn expects fair value assessments will undergo a similar evolution and the initial documents will need to be tweaked.
She noted the process has been a "bit of a headache".
The duo went on to highlight that Consumer Duty means is vital that advisers challenge providers for the necessary information and undertake proper due-diligence when it comes to outsourcing.
"It is the responsibility of the adviser to make sure the provider gives them the right documentation," explained Hepburn.
