Investment groups are racing to get new products out the door or put new marketing clout behind those they already offer.
While the opportunity for various parties to make money is clear this trend does not come without dangers, both for the buyers and the sellers.
Recent examples include Standard Life entering talks with investment groups to add six new model portfolios tailored to retirement to its platform this year, and RSMR rolling out new model portfolios specifically targeting one-man-band and duo advisory firms.
The benefits to financial advisers and wealth management firms are pretty clear. It takes a huge amount of work off advisers’ plates while transferring risk to a third party.
Sending a client’s money straight through to a chosen model portfolio provider means day-to-day monitoring is not necessary. Advisers get more time to concentrate on strengthening their client relationships, and chasing new ones.
In the providers’ case new model portfolio products allow them to broaden their income stream and boosts the bottom line, if all goes as planned.
The benefits to investors are perhaps slightly less striking. The principle ones being that it makes diversified investment portfolios cost less and makes them available to those with pots of money considered too small for wealth managers to offer a bespoke service.
The danger stemming from a rush to tap into greater demand for model portfolios has two sides to it.
Firstly there is the risk to the end investor. In the haste to bring these products to market as quickly as possible is it feasible that the quality and suitability of the new offerings will be compromised.
There are already concerns that different providers are defining the risk levels of portfolios with certain sets of characteristics in different ways. One provider’s ‘aggressive’ portfolio being very similar to another’s ‘balanced’ being an obvious example.
That is before you even deal with the issue of deciphering what individual investors’ own understanding of their personal risk tolerance is.
There is little point in an investor confidently telling their adviser they are happy with a high risk portfolio if they do not fully appreciate the level of possible downside that entails.
It is crucial that careful and thorough work is done at the financial adviser level to make sure investors get the right products, a task only made harder when there is a raft of new ones hitting the market to consider.
The other side of the coin is the risk to the wealth management firms offering these products, or planning to. In the clamour to design and push the new offerings out the door into the market quickly they run the risk of overinvesting and stretching their resources.
Should investor demand not be there in sufficient quantity to meet the supply there could be a lot of money wasted and unwise hires made.
There is also regulatory risk to consider. Every new product an investment group rolls out brings its own risk of something happening which upsets the regulators and leads to fines, or worse.
There is clearly merit in greater development of model portfolio offerings and demand has plenty of room left to grow. However, providers need to make sure they do not rush things or overplay their hands, and advisers must approach putting their clients into model portfolios with requisite caution.
