One-third of advised clients were impacted by the Tory’s CGT changes. Labour is rumoured to be planning further changes. What impact might this have on client investment propositions? Will we see a shift away from MPS back to multi-asset funds? Or, as I learned about on a recent study tour to the US, will we see the rise of SMAs offering tax optimisation alpha?

What advisers recommend today

Let’s start with a bit of context. We recently published two reports on the investment solutions recommended by financial advisers in client portfolios.

• Three quarters of financial advisers use multi-asset funds for one quarter of new client money.
• 61% use discretionary MPS, for 31% of new client assets
• About the same number build their own portfolios – 61% build their own portfolios for 30% of client money.

These stats come from our Multi-Asset Distribution Dynamics report (MADD) report.

Looking ahead

When we ask financial advisers to look ahead 3 years, they say they will increase use of discretionary MPS and multi-asset funds. The investment solution they are most likely to be turning away from is adviser-built models.

So where will money go in future?

We’re bullish about the continued future growth of discretionary MPS. We just updated the figures to the end of Q1 2024 and assets in discretionary MPS grew a stonking 28% in the year. We continue to see a shift from adviser managed models to discretionary MPS and Tatton, Quilter Wealth and Timeline are emerging as dominant players in terms of net asset growth. (Source: Discretionary MPS Proposition Comparison report, June 2024)

Markets were strong over that period aiding growth, but we also hear that fee pressure played a big role along with continued regulatory pressures on advice businesses.

But is the future really all about MPS?

The alternatives to discretionary MPS are adviser managed models, bespoke discretionary and multi-asset funds.

• Adviser managed models are increasingly out of favour. It’s the investment solution advisers are most likely to say they are moving away from. Co-manufacturing requirements under Consumer Duty make these harder than ever to manage, reducing the appeal for time-strapped advice firms.
• Bespoke discretionary seems to be enjoying a bit of a resurgence. 24% of advisers expect to increase use of the solution and only 6% expect to decrease use (Source, NextWealth Multi-Asset Distribution Dynamics report). It can be a good solution for clients keen to manage tax liabilities in decumulation or with specific investing requirements (i.e. senior execs looking to diversify against a large stock holding). Sean Osbourne of Charles Stanley debated in favour of bespoke discretionary and won the day at NextWealth Live. You can listen back to his arguments here. Client tax liabilities can be more closely managed in a bespoke service. If we continue to see tax hikes on capital gains, this may become more appealing.
• Multi-asset funds are used for clients with smaller portfolio values, to access smoothed returns from the likes of the PruFund and to manage client CGT liabilities, typically alongside an MPS. Many have argued that they are a superior structure to an MPS but the direction of travel seems clear – at least for clients with larger sums to invest.

I mentioned before that I was in the US recently on a study tour. I was a guest of Fidelity on a fantastic trip learning about US financial advice firms – their business models, investment propositions and tech stack. While mutual funds and ETFs continue to dominate, there are USD 2.2tn of assets in SMAs and they’ve enjoyed a 10% 5 year CAGR. Wowza.

SMAs (separately managed accounts), are portfolios of individual securities managed on a client’s behalf by a professional asset management firm. Many large active managers (including Capital Group – the largest active manager) offer SMAs. Tax gains are off-set against losses, delivering what some term ‘tax alpha’. Many financial advisers in the US include a figure on client reports to demonstrate how much tax alpha they have earned for clients as a way to demonstrate and quantify their value.

SMAs have been discussed before. Michael Ohanessian founder of Praemium (now the Morningstar platform) talked about SMAs at NextWealth Live in 2019 . But their application in the UK was limited at the time. CGT could change that. Indeed, as I said in the first sentence of this newsletter, advisers told us that one third of their clients have been impacted by the Tory’s changes to capital gains tax. If we see further changes, appetite for a more tax-efficient way of investing, as compared to MPS, might take hold.

What will the future hold for the investment solution? Industries are re-made by technological, regulatory and consumer behaviour changes. We’re sailing through a storm of all three. In the near-term, MPS will dominate and multi-asset funds may play a bigger role. But I wouldn’t discount some heavy disruption over the next 5-10 years.