Non-Negotiable Criteria for Vetting Your Next Model Portfolio Service

If you’re going to work with a Model Portfolio Service provider, then it’s vitally important that you ensure that you’re working with a good one. These organisations will design and manage portfolios on your behalf, and thus a significant amount of risk (and opportunity) is often tied up in your choice of provider.

But according to which criteria and benchmarks might you judge a provider? What separates a trustworthy one from the rest of the pack?

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Rigour and Transparency of Governance Structure

The investment decisions taken by your provider should ideally be systematic and repeatable. You’ll need a paper trail that will allow you to audit any given investment – and the organisation itself should have a committee that does this on your behalf at regular intervals, while leaving minutes of its meetings.

Having a formal structure of this kind will allow you to avoid a situation in which unaccountable, anonymous individuals have taken investment decisions on your behalf. This will make compliance issues with the FCA less pressing, while also cutting risk for you and your clients.

Philosophy Alignment and ESG Integration

If you’re working with clients with an expressed set of values, then you’ll want to ensure that your MPS provider is a good match with them. If you need investments that are environmentally defensible, then you’ll want to avoid working with portfolio managers who will invest in unsustainable forestry or fishing initiatives.

Make sure that your MPS provider is taking the desired approach to the market. Passive approaches are not appropriate for clients seeking to beat the market, while active ones are not appropriate for clients seeking to minimise risk. Often, a blended approach is called for. When ESG concerns are paramount, you’ll need to ensure that your MPS provider understands them.

The services you use can often shape your business in unexpected ways. You’ll want to pick a partner that can scale alongside you, and that can adapt to the varying whims of your clients.

Seamless Platform and Operational Integration

You’ll want to make sure that the partners you work with don’t introduce friction into your operations. This often means picking the firms that can easily integrate into established investment platforms. This vastly simplifies reporting and execution. A well-integrated partner will lead to more frequent errors, and more administrative work reconciling problems.

Defined Risk Management and Downside Capture

When the market you’re working within is on a downward trajectory, the behaviour of the MPS provider can often make a difference between survival and ruin. As such, you’ll want to take a look at how the MPS provider performed during previous downturns, like the COVID-19 pandemic and the financial crisis of 2008. The provider should be able to talk you through their approach to loss mitigation.

It’s essential that your values, and approach to risk, align. More importantly, they should align whether you’re operating in a bear or a bull market.

Total Cost Transparency and Fee Rationale

Above all, you should only work with partners whose prices are transparent and justifiable. If hidden costs emerge later in your partnership, it might be that you decide that it wasn’t worth the money. Look at the Total Expense Ratio, including platform costs and fund charges. If you are passing on costs to your clients that are not sufficiently transparent, then their trust in you might be put at risk. Don’t accept this!

David Prior

David Prior is the editor of Today News, responsible for the overall editorial strategy. He is an NCTJ-qualified journalist with over 20 years’ experience, and is also editor of the award-winning hyperlocal news title Altrincham Today. His LinkedIn profile is here.