By Sarasin & Partners

Just how does an adviser go about identifying the best MPS providers for their specific needs?

Increasingly onerous regulations are prompting many IFAs to partner with discretionary fund managers (DFMs), and utilise platform-based model portfolio services (MPS). That said, choosing the right DFM partner can be daunting. So how does an adviser go about identifying the best MPS providers for their specific needs?

Focus on performance

It may be tempting to choose a DFM who has achieved short-term outperformance, but performance should be measured with care. For example, it is not unusual to find that last year’s worst-performing fund manager achieves top-quartile performance this year.

Periods of three to five years and longer provide a more informed view. It is also important to consider performance over discrete, one-year time periods to ascertain whether five-year performance is due to outperformance over a very short time period, or achieved gradually. Risk-adjusted performance is also important and a key indicator of whether an investment process will provide smooth or stop-start returns.

Sensible costs and value for money

Fees have long been a central consideration when evaluating any investment product or service. But it’s not just these costs that an adviser must consider – platform charges, wrapper costs and the adviser’s own fees must also be accounted for.

Under MiFID II legislation, DFMs must provide a breakdown of the total cost of their investment services, including transaction costs, so advisers can now scrutinise costs and compare DFMs more easily. Costs should also represent fair value. Under Consumer Duty regulations, DFMs are required to provide value for money analysis of their MPS.

Solvency and robustness

When evaluating the financial strength of a DFM, an independent measure of an investment manager’s financial strength such as an AKG rating can provide a useful third-party view. Recent or planned changes of ownership should also be considered.

Attentive service and clear communication

Good two-way communication is fundamental to forming a close business relationship, developing trust and retaining confidence. DFMs should be in regular communication with their advisers, keeping them abreast of investment views and how portfolios are positioned. They should also inform advisers of upcoming rebalances and say why the changes are being made.

First impressions count. A client’s first encounter with an MPS service is often via client-facing literature. Well-presented and clearly-written client literature – perhaps with the option of dual-branding – can go a long way to enhancing your client’s experience.

Team and culture

Running a successful MPS over a multi-year period requires an experienced and skilled portfolio management team. But experience and skill may count for nothing if the portfolio managers aren’t well supported by administrators, fund researchers, economists, strategists and a dedicated risk office.

The investment process should not rely on any one individual and investment decisions should be scrutinised by peers. Risk controls should ensure portfolios are managed in accordance with the agreed mandate and risk parameters.

Enhancing your MPS selection

Many advisers split larger client accounts between several DFM partners to achieve additional diversification. Blending DFMs that have different approaches and performance outcomes can help provide a smoother return profile across the economic cycle.

Take time to decide

Partnering with discretionary fund managers is an increasingly attractive proposition for many IFAs. But with a vast array of DFMs and investment strategies to choose from, finding the best fit can take time. Being armed with the relevant selection criteria and a checklist of questions are essential first steps in exploring whether to partner with a DFM.


If you would like to discuss any of the issues mentioned in this article, please contact Sarasin and Partners:

T +44 (0)20 7038 7000

If you are a private investor, you should not act or rely on this document but should contact your professional adviser. The value of your investments and any income derived from them can fall as well as rise and you may not get back the amount originally invested. Past performance is not a guide to future returns and may not be repeated. Sarasin & Partners LLP is a limited liability partnership registered in England and Wales with registered number OC329859 and is authorised and regulated by the Financial Conduct Authority.

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