Crossing the Atlantic: Model portfolios

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The adoption of model portfolios has caused extensive disruption across the US fund-distribution landscape. This trend is also gathering momentum in Europe, where a shift towards discretionary control of assets is apparent.

Interest in Europe has been fuelled by intermediaries reviewing their business models in response to regulatory due-diligence burdens. Like in the US, streamlining of processes and technological developments have provided additional impetus. But this evolution is complicated by existing and emerging gatekeepers disrupting the traditional value chain.

Model-portfolios landscape – New and existing channels

Quantifying the opportunity for asset managers is difficult because of the cross-over of channels and Europe’s fragmented and heterogenous distribution landscape. At present, a qualitative assessment of individual market opportunities is most insightful. Here we examine some of the market drivers shaping uptake of model portfolios in two of Europe’s largest markets – the UK and Germany.

Outsourcing and insourcing in the UK

The adoption of model portfolios is most evident in the UK where, in marked contrast to continental markets, the advice channel dominates. After the UK’s Retail Distribution Review was implemented in 2013, it became difficult for small advisers to perform portfolio construction, and many decided to outsource investment selection. Large firms set up centralised investment solutions for the use of their advisers, but smaller firms partnered with external providers – particularly DFMs (discretionary fund managers).

DFM-led model portfolios subsequently mushroomed, and platform providers have supported this growth by providing functionality for these. As time has passed and cost has become increasingly important, some advisers have begun to question the benefits of outsourcing so much of their value proposition, instead opting to gain discretionary permissions themselves. Some are also launching their own funds, while others are offering their investment expertise to other local advisers. And asset managers such as Aberdeen Standard and Invesco, together with large wealth managers including Quilter and St James’s Place, are accelerating the pace of this vertical integration with their ranges of model-portfolio options – a trend that is being closely watched by the UK regulator.

Keeping things simple in Germany

In Germany, growing demand for model portfolios is also evident among IFAs – though it should be noted that this channel is more niche than in the UK. The increasing popularity of models versus individual funds has helped IFAs reduce costs, and streamline paperwork for advisers and clients alike – once the client is invested in a particular pool, the asset manager can operate the portfolio on a discretionary basis. As gatekeepers, IFAs using managed portfolios are attractive targets for asset managers.

Model portfolios are a major feature of robo-adviser services, and Germany is home to the largest number of robo-advisers in Europe, with around 30 companies competing in this increasingly crowded marketplace. Scalable Capital is believed to be the largest operator, with AUM currently well in excess of €1bn, and all strategies comprised of ETFs. An eye-catching new entrant to the market is Italian firm MoneyFarm, which recently announced that it has partnered with Allianz Global Investors (one of its financial backers) to make active multi-asset strategies from Allianz available to German investors.

Despite a lot of activity and product offerings, the robo-advice market in Germany (as elsewhere) is still relatively small, with clients tending to be towards the wealthier end of the spectrum. However, as digital and asset management specialists join forces, and younger digital natives turn towards investment, the market is expected to grow. Asset managers operating in this space need to take a long-term view and have the resources to build scale.

More details of market opportunities in Germany and the UK can be found in Distribution 360.

Further insights into the US market trend, can be gleaned from the Broadridge white paper – ‘The Rise of Model Portfolios’.