Financial advisers’ use of DFMs and multi-asset funds by grew rapidly post-RDR. More broadly, in-house model portfolios and similar ‘investment solutions’ have become more popular with advisers, all at the expense of building bespoke advisory portfolios for each and every client.

Wealth managers running model portfolio services (MPS) have seen large inflows into their portfolios, particularly those hosted on adviser platforms. But what are the key trends in the pricing of these MPS?

DFM portfolio charges have been squeezed in recent years. ‘Fees and charges’ is always the most commonly selected factor by which advisers compare DFMs. Several low-cost options have launched onto the market and new fee models are emerging, including some flat fee propositions.

Yet despite the margin squeeze, DFM charges have stayed relatively buoyant: DFM fees for active portfolios on platforms continue to cluster at around 0.36% (0.30% + VAT). The median charge for passive portfolios is much lower at 0.20%.

The VAT question

One big shift we have seen in 2020 is that more providers are removing VAT from their DFM model portfolio charges. HMRC is making its decisions about the exemption for VAT on a case-by-case basis. So, there is always the danger that it will judge some services are exempt but others don’t cross the line and are therefore still VAT-able. Worse still, HMRC could change its mind or the rules could be reversed – which might explain why some DFMs have hesitated.

We expect more wealth managers to take VAT off their MPS, under pressure from advisers looking to shave half a dozen basis points off the cost of investing. This is one more move towards increasing the attractiveness to advisers of outsourcing to a DFM.