Advisers have moved to outsource their investment proposition, shifting clients into a variety of outsourced plans, or creating their own in-house models.
At its most basic level, a model portfolio is a type of investment composed of a variety of core asset classes, such as equities, fixed income and property.
The portfolio is run by a general investment manager, rather than a fund manager with a specific focus. It can invest in multiple funds, but is not exclusively comprised of them.
The majority of models are risk-rated and range from more conservative offerings to aggressive, equity-focused ones. However, investors can also find model portfolios that are income-paying, rather than just risk-targeted.
Many model portfolios are available through discretionary fund management (DFM) groups, such as London & Capital and Brooks MacDonald, but some advisers prefer to compile their own models through funds they have selected in-house.
The models are spread across a variety of asset classes and regions, meaning investors can diversify their holdings in a single portfolio and with an initial investment that is below that for bespoke offerings – typically for as little as £1,000.
Fees vary, but are often lower if the investor uses an adviser.
Lee Robertson (pictured), chief executive officer of Investment Quorum, says model portfolios are a good middle-ground between multi-manager funds and truly bespoke portfolios, which are often out of reach of investors due to their high minimum investment requirements.
He points out that models are often more closely aligned to a client’s risk tolerance, even though the products are available pre-made via platforms. "Models can be quite bespoke but it depends on how far the provider is willing to go to tailor the portfolio," he said.
Robertson added that while model portfolios have a wider range of investments to choose from, it is worth bearing in mind these are not pure bespoke products.
He also says that performance is difficult to compare among model portfolios, because there is no standardised method that firms can use to report their data.
"You can look at a fund at the moment and see its performance but that’s quite difficult to do with model portfolios."
For investors who have less money to invest and do not want to seek advice, Robertson recommends sticking with single or multi-manager funds, because performance is easier to track.
"If you have a small amount of money it may be best to feel your way into the market through a single multi-manager fund," he commented.
Bill Vasilieff, chief executive of Novia, says model portfolios tend to be cheaper than their multi-manager counterparts and that the concept of risk-targeted models could more closely align to the clients’ needs.
"[Investors] bear the charges funds bear after rebates," he commented. "You can get models down to as low as 50 basis points on the low end and on the high end around 100 basis points after rebates."
Robertson has seen increased demand from investors for model portfolios, particularly as they become more readily available via platforms.
"There is a growing awareness among the general investing public that large fund companies are not generally on investors’ side and the investors are looking for something a bit more dynamic that fits their needs better, not just a blue box off a shelf," he added.
"The engaged investing public is becoming a bit more discerning."
Investors need to be wary of being shifted into a “one-size fits all” model and ensure that they or their adviser are only investing in the model because it is the most suitable solution for their specific needs.
FE Research is currently populating a range of model portfolios for advisers, based on risk and volatility rather than asset allocation.
The 15 portfolios exist in five risk levels, with a portfolio each for investors with a short-, medium- and long-term view.
Rob Gleeson, head of FE Research, says risk-targeting allows the funds to take on "more aggressive" asset classes for returns, without sacrificing the overall stability of the portfolio.
"We’re also starting to collect model portfolio and DFM data," Gleeson added. "Currently it is difficult to compare performance of DFMs."