The model portfolio sector in the U.K. is at a crossroads. Following a sales boom in 2023, model portfolio (MPS) gross sales growth in the financial adviser channel in the U.K. slowed to just 6% during the first half of this year. This has left many people wondering: have we reached the peak of the MPS adoption curve?
Let us first consider the facts. According to the data, around 90% of gross sales for all funds are coming from firms already using models to some extent.
On the face of it this might suggest market saturation, but dig deeper and there is a different story.
MPS is no longer the shiny new thing
In a world where most adviser firms may have already decided what role (if any) models should play within their investment proposition, the real question is how many have yet to reach their full potential for MPS adoption.
And although MPS gross sales lagged the broader channel sales in the first half of 2024, model portfolios continued to bring in net new money driven by the adoption of outsourced MPS programmes. In fact, MPSs collected £8.6 billion in net sales, compared with non-MPSs which saw £4.3 billion in outflows.
So, while the terrain might be changing, there are still a lot of assets that could convert to MPS. And as long as models are still capturing new sales at a higher rate than their share of outflows, they will stay on that growth path.
While for now insourcing remains prevalent, there is a question of how much more room it has to run, something which will be tied to the trajectory of consolidation in the UK. The outsourcing trend on the other hand is something we expect to continue as we see more model providers converting new IFAs.
Consumer Duty is also leading to many questions around choice, which appears beneficial to outsourced model providers looking for new territory. Interestingly the outsourced component grew much more quickly than models as a whole in the first half of 2024 – the growth here is much closer to what we saw for non-model sales.
With all this considered, the data seems to show we are not yet at the adoption peak, but rather a crucial midpoint in the ascent. Peak model portfolio sales may still be 5 to 10 years away.
Will CGT throw a spanner in the works?
One potential obstacle for MPS providers within the financial adviser channel is the spectre of Capital Gains Tax (CGT) allowance cuts. Could these make multi-asset funds more appealing due to reduced rebalancing charges?
If we put things into perspective: over three quarters of sales in the MPS universe flow through ISAs and pensions, which as we know are not necessarily subject to CGT.
The other thing to consider is that models’ main target is the mass affluent segment. And given this group’s portfolios tend to be smaller, CGT considerations are generally less pressing.
That said, we cannot dismiss the CGT issue entirely. For firms dealing predominantly with high-net-worth clients, this will be a much more sensitive topic. In addition, given such a significant chunk of model adoption is tied to central investment propositions, there is most certainly a chance that some players could start looking to unitised multi-asset solutions as the better fit across their broader client base.
While we may not be seeing much movement here yet, we could well see a more significant change materialising as centralised investment propositions continue to take hold and advisers strive to simplify investment selection, choosing investment solutions with the broadest application.
Tax is just one consideration in the investment and planning process. As we all know, cost is another major driver across the IFA and portfolio construction universe. With this in mind, providers will need to continue sharpening on price if they are to retain an edge in the hyper competitive MPS and multi-asset space.
The MPS revolution isn’t over – it is simply entering a new, more mature phase. Those who innovate, adapt, and focus on delivering tangible value to advisers and their end-clients will still find opportunities to thrive. To learn more about ISS MI’s Model Portfolio Service Report, visit https://www.issmarketintelligence.com/solutions/marketsage/uk-model-portfolio-sales-report/
By: Benjamin Reed-Hurwitz, EMEA Research Lead, ISS Market Intelligence
A version of this article appeared in FT Adviser on 18th December 2024
