Say the term model portfolio services, and ordinary investors may not know what they actually are.
But model portfolios have been rising in popularity alongside multi-asset funds.
But how do these differ from multi-asset funds, and which ones should clients opt for?
Model portfolio services
Ricky Chan, chartered financial planner and director at IFS Wealth and Pensions, highlights that model portfolio services enable investors with more modest portfolio sizes to access similar benefits to those using a discretionary fund manager.
“These usually target a variety of investment strategies to match different levels of risks and are commonly available via platforms now.”
Mr Chan adds: “They are often used as outsourced investment solutions by financial advisers to tap into greater expertise and resources for investment management, and MPS's are more cost-effective than a full discretionary managed service, which by contract could be tailored to meet individual circumstances and needs."
James Higton explains that models are funds that are run by a fund manager on behalf of an investor. The fund manager is classed as a DFM for this type of investment, as they have investment autonomy of the funds to hold for the investor.
“The portfolio usually consists of a range of “single asset funds” which are funds that normally invest in a particular asset class such as UK equity, government bonds etc,” says Mr Higton.
He notes: “The funds are held by the investor directly and normally on an investment platform but are managed and rebalanced by the fund manager on behalf of the investor. There is usually an option when choosing the portfolio that is managed around the different risk levels.”
Most commentators stress that MPS are more costly than DFMs' own service charges, but in themselves cheaper than multi-asset funds.
Cost of model portfolios
Mr Higton says the fees for a model portfolio are normally split into three sections.
These are:
- The first is the fee for the fund manager or DFM. This usually ranges between 0.2 per cent and 0.4 per cent dependent on the chosen portfolio. This fee covers both their services for the investment choice and the cost of rebalancing the portfolio so it continues to align with the chosen risk level.
- A charge for the underlying funds held under the portfolio. As with any other investment, this can change dependent on the chosen style. For instance, a passive portfolio may only be around 0.3 per cent whereas actively managed funds could be between 0.7-1 per cent.
- Model portfolios are also held on an investment platform which has an additional cost of around 0.2 per cent to 0.4 per cent. The platform charge would be the same whether the investor was choosing a model portfolio on a platform or using a multi-asset fund since the price is linked to the investment totals.
Many in the industry stress that model portfolio services are less tax-efficient compared to other vehicles.
“When investing in 'unwrapped investments' [such as MPS], the control over the capital gains tax is reduced.”
He explains this because the underlying funds are held directly with the investor so any rebalancing or selling of the funds will realise a gain for the investor. Thus, the control over the tax position in this type of account is negligible and could lead to unwanted tax payments.
But he notes that investing in other vehicles such as Isas, pensions or investment bonds do not pose this problem.
Mr Chan echoes this view. He says while MPS is better for having a wider range of risk profiles and asset allocations than a single multi-manager or multi-asset fund, they have their downsides from a taxation perspective.
But he adds: “However, they are arguably less tax-efficient due to the service being liable for VAT, whereas say a multi-manager multi-asset fund would not incur VAT on fund charges. In addition, outside of tax wrappers (such as Isas and pensions), a rebalance of funds in a MPS will be liable for CGT whereas this would not happen within a fund.”
