UK wealth managers are expected to increase their use of model portfolios over the next two years, driving further adoption of ETFs, according to a recent survey conducted by Cerulli Associates.
Fabrizio Zumbo, Associate Director, European Asset Management Research, Cerulli.
Almost half (46%) of UK wealth managers expect to use model portfolios more extensively over the next 12 to 24 months compared to just 2% that plan to decrease their use over the same period.
Currently, just 14% of survey respondents do not use model portfolios for their clients.
Greater efficiency was found to be the main driver of increasing adoption of model portfolios in the UK wealth management space with advice firms turning to external solutions so that they can focus on financial planning rather than investment management.
Fabrizio Zumbo, Director of European Asset and Wealth Management Research at Cerulli Associates, commented: “The increased use of model portfolios, from an advisor perspective, is the simplification of propositions and business, allowing for greater efficiencies and scalable client management – and ultimately, cost reduction.
“Advisors can also ensure that their clients are invested in line with the house view, creating greater consistency of client outcomes.”
UK wealth managers also indicated that commercial considerations are positively impacting demand for model portfolios. Historically, multimanager propositions typically resulted in higher fees; however, managers who are building model portfolios using ETFs have been able to bring down the cost of investing in a whole-portfolio context while delivering diversified market exposure.
These inherent benefits of ETFs have led to a considerable shift in asset flows, highlighting the potential for even greater use of model portfolios to drive another nail in the mutual fund coffin.
According to Cerulli, however, while cost considerations will continue to drive the agenda and contribute to a decline in mutual funds, the UK platform market, which is leading the way in terms of offering discretionary services, has not kept up with the ability to use ETFs from a technology perspective.
Cerulli also notes many wealth managers view model portfolios as complementary to mutual funds as asset allocation and manager selection are believed to be key features of model portfolio services.
Finally, mutual funds offer a different level of flexibility and access to the widest investment universe. Decisions are implemented much more quickly – real-time, intraday decision-making compared to the typical quarterly rebalance of a model portfolio.