Navigating the Complexities of MPS: A Comprehensive Guide for Financial Advisers

For financial advisers, the advantages of integrating an MPS into their practice are increasingly well-recognised and understood. Its flexibility, alongside its ability to deliver better outcomes for clients, plus regulatory and reporting advantages have helped propel MPS to double-digit annual growth and widespread adoption. However, to realise the advantages of MPS in full, advisers have to navigate some complexities.

Managed Portfolio Services have grown in popularity. Consumer Duty has turbo-charged adoption, by placing greater pressure on existing investment propositions. Advisers have sought outsourced options to help meet their obligations.

The advantages are clear. Financial Advisers can continue to provide their clients with professional management of their investment portfolios. MPS providers can draw on a broad opportunity set to balance risk and reward, and achieve the best possible outcome for advisers’ clients given their risk. By leaving investment management to a specialist, advisers have more free time to focus on delivering the other, equally important, elements of their clients’ financial plan.

Regulatory compliance

In general, an MPS should help advisers with their regulatory burden and their compliance with COBS. It can take care of the reporting headaches that come with managing clients’ investments, while also helping meet consumer duty obligations. Nevertheless, financial advisers using an MPS still need to navigate regulatory compliance. The regulatory landscape in the UK is dynamic, with ongoing changes that impact how an MPS is managed and supervised.

Advisers need to stay informed by regularly reviewing updates from regulatory bodies such as the FCA and Prudential Regulation Authority (PRA). This is particularly important at the moment as the FCA undertakes a Consumer Duty review of MPS solutions. Internal processes and systems need to be capable of meeting regulatory requirements, while regular audits can help identify and rectify compliance gaps.

Cost efficiency

Cost efficiency is a critical factor in realising the full benefits of MPS. Many advisers choose MPS over unitised products on cost grounds and need to ensure that the cost benefits are realised. It is important that, when comparing different MPS options, financial advisers consider the total cost of the portfolios they are going to recommend for their clients. There will be a clear AMC for an MPS but some MPS providers are able to use their buying power to negotiate preferential shareclasses of assets on behalf of clients. It is this total cost (including any transaction fees) that is the important fee to include when conducting a review of potential partners.

Advisers must balance these costs against the potential returns. Analysing performance has been tricky. MPS providers do not routinely publish monthly factsheets with details on performance, volatility, and holdings, which means advisers don’t necessarily have comparable data at their fingertips. Advisers have historically had to go to the individual asset manager or DFM and ask for the data, which can create problems in making direct comparisons.

However, performance measurement has improved significantly. There are now a range of independent providers in the market looking at the different MPS providers and evaluating their offerings. Advisers can readily compare performance on a level playing field and ensure that fees are justified by returns.

Diversification strategies

Diversification is a cornerstone of effective portfolio management, helping to mitigate risks and enhance returns. An MPS should be an easy way to achieve diversification for clients, but as with performance, some providers will do a better job than others. The well-documented problems with implementing MPS on platforms have led to some commoditisation of offerings. Advisers need to make sure their MPS provider is bringing all their research and analytical tools to bear on the portfolios they provide, rather than simply delivering an ‘off the peg’ solution.

While ensuring diversification is difficult, advisers can look at whether an MPS provider holds a range of asset classes, a mix of stocks, bonds, property, commodities, and cash, and that those asset classes cover a range of different industries such as technology, healthcare, finance, and consumer goods, plus a range of geographic regions. They can ensure that the portfolio is rebalanced regularly and is appropriate for their clients’ risk tolerance. However, the real proof will be in the pudding: does the portfolio protect sufficiently at times of market stress?

Integrating an MPS into your practice

Effective integration of an MPS into an advice practice requires strategic planning and ongoing management. Advisers will need to decide whether they want a more transactional approach or a true partnership. There are a number of key steps for integration: client assessment to establish risk tolerance and long-term goals, devising a tailored investment plan, and client education. Finally, advisers need to assess how their MPS provider can, in addition to these steps for integration, help regularly communicate market insights and investment updates in an appropriate way for their clients.

Navigating the complexities of a Managed Portfolio Service requires a comprehensive understanding of regulatory compliance, cost efficiency, and diversification strategies. By implementing MPS effectively, advice practices can realise its benefits in full for clients and continue to provide good outcomes that meet their clients’ expectations.

Contact us to find out more