Discretionary MPS

By Next Wealth | 07 December 2021 | 3 minute read

Today we published our annual Discretionary MPS Proposition Comparison report. The report is available for purchase (data providers get a free summary as do financial advice professionals on our research panel).

Having interviewed dozens of DFMs, analysed pricing information on 307 portfolios and compared asset growth for 38 DFMs, here are some of my reflections on this part of the market:

  • Discretionary MPS is among the most widely used investment proposition among UK financial advisers. It has seen rapid growth over the past few years. The 38 DFMs we profiled in our report account for £95bn in assets.
  • It’s a crowded market with many new and planned entrants. There are 189 DFMs offering MPS across the 19 platforms we reviewed. If you remove the 73 on only one platform, that leaves 116.  DFMs tell us that differentiation is a key challenge.
  • Technology is woefully underused in this part of the market. Too much operational and execution risks exists in the last mile – rebalancing models on platform. Some DFMs on some platforms are making good use of tech but more needs to be done. All instructions should happen over API. One of the challenges is figuring out who should pay.
  • There is a huge amount of pricing pressure – particularly on the MPS or annual service fee. The annual MPS fees tend to be clustered around 20-40 bps. OCFs are more varied. Financial advisers should consider all-in costs (MPS fee + OCF) when comparing DFMs. We hear there isn’t as much pressure on OCFs. We found evidence that lower costs are influencing flow: DFMs with the lowest overall charges (MPS fee + OCF) are growing fastest.

Growth outlook

We think asset growth will continue for discretionary MPS, driven by three accelerating trends:

  • Growth in demand for financial planning and advice.
  • Shifting assets from bespoke discretionary.
  • Continued move away from adviser managed models.

Despite this optimism, there are risks to incumbents, primarily from consolidation of financial advice businesses, price pressure and innovative new entrants.

Firms looking to launch discretionary MPS need to think carefully about how to get cut through in a crowded market. Differentiation on price is tricky when fund management giants LGIM and Vanguard are offering passive MPS for an all in fee of less than 35bps. Firms that have both custody and portfolio management such as 7IM, Parmenion, AJ Bell and Nucleus offer a powerful differentiation in integrated tech. Firms without a clear differentiator will find it hard to win a coveted spot on an advice firm’s panel.

You can find out more about the Discretionary MPS Proposition report here and download the table of contents. Get in touch to buy a copy.

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