Tony Hicks, Head of Sales, Copia Capital

For professional advisers only

Investment success sits at the heart of financial planning to help clients meet their long-term objectives. However, the increasing regulatory burden created first by MIFID II and now with Consumer Duty has made managing investments in-house increasingly complex.

Since the introduction of MiFID II, switching funds and rebalancing portfolios can create significant work for firms, especially for those operating under advisory permissions, with the need to obtain client permissions as well as meet the disclosure and suitability requirements. Consumer Duty’s rules on avoiding foreseeable harms and ensuring all trades and activities are likely to represent fair value have raised the bar even higher, increasing time spent on admin. Our research earlier this year into Centralised Investment Propositions found that on average firms are spending 81 days managing their CIP, up from 71 days in 2022.

And of course, Consumer Duty isn’t just a ‘one-and-done’ job, it requires ongoing compliance. Almost two-fifths (38%) of our respondents expected the regulatory burden to continue to grow over the next 12 months, while a third (33%) anticipated that ongoing risk management would increase. Effective outsourcing can make a significant difference to the admin burden and reduce business and operational risk. It is little wonder that 55% of firms are now outsourcing investment management, compared to 34% running models in-house – a reversal of our findings in 2022, when 51% were running their own models and 38% outsourcing.

Distributors and manufacturers

However, Consumer Duty has also brought with it new terminology and rules around the roles of different participants within the financial services supply chain, which it refers to as distributors, manufacturers and co-manufacturers.

• Manufacturers are firms that create, develop, design, issue, operate or underwrite a product or service. This includes advisers running investments in-house, discretionary fund managers offering a model portfolio service, tailored or custom solution, fund managers and investment platforms. 
• Distributors on the other hand are firms that offer, sell, recommend, advise on, propose or provide a product or service. From the perspective of investment services, if you are recommending third-party off-the-shelf investment products and have no influence on investment construction, you are the distributor. If your firm white labels the investment service, it must be clear who is actually providing the service to ensure the client doesn’t think you are the manufacturer.
• Co-manufacturers are firms that determine or materially influence the manufacture of a product or service. If you are offering a tailored solution where you input into the design of the investment, you will be classed as a co-manufacturer as well as the distributor of the investment services.

Some firms worry that being a co-manufacturer will add some of the risk back into their business which they sought to remove through outsourcing. However, in reality, being a co-manufacturer can bring a number of benefits to a firm including de-risking your operations, as long as the responsibilities of each party are clearly defined at the outset. 

The benefits of co-manufacturing

Our 2024 research found a tipping point with CIPs, where firms either have to invest in systems and people, and potentially take on their own discretionary permissions, to continue managing it effectively in-house, or outsource to an external investment manager. One of the biggest benefits of creating a custom mandate managed by a DFM is that it adds extra expert resources into the firm without the overhead of hiring new staff. As well as specialist investment managers, a DFM partner can also bring access to cheaper share classes, extensive investment research and market information that is out of reach for many advice firms running models in-house, or even those using off-the-shelf investment products. This approach can deliver the best possible client outcomes while giving you more time to focus on financial planning, client relationships and growing the business.

According to our previous research among over 200 advisers at the 2022 Personal Finance Society’s regional conferences, a quarter of firms (25%) worry that outsourcing will lead to a loss of control. However, with a co-manufacturing approach, firms retain greater control over the investment process. For instance, Copia’s MPS Custom service delivers tailored portfolios, bespoke to each IFA, based on asset allocation and investment selection agreed with the advice firm.

This approach can also enhance the value IFAs add to client outcomes by delivering a personalised investment strategy based on their specific needs. As a co-manufacturer, the FCA is highlighting advisers’ involvement in the investment process, providing additional evidence of the value for money the firm is providing to clients.

Defining responsibilities

In order to reap the benefits of co-manufacturing, firms need to establish clear responsibilities for each party at the outset. Having an agreement in place between the advice firm and the DFM is a regulatory requirement and it’s also important to ensure your PI insurer understands where the risks and responsibilities lie. Copia has always had a transparent agreement with advice firms to make handing over the risks of investment management as easy as possible. We’ve fined tuned this under Consumer Duty to add further clarity to the roles of each party and make it clear to advice firms and their clients, as well as the regulator and PI insurers, that the responsibility and liability for managing money sits with us.

In Copia’s agreements, the adviser is responsible for defining the target market, assessing suitability, reporting to the client and ensuring the client receives fair value. Copia is responsible for designing the MPS model, managing the portfolios, reporting to the advice firm and ensuring the service delivers fair value.

In essence, Consumer Duty hasn’t materially changed the responsibilities of advice firms or DFMs, but it has created the need to define and document these responsibilities.

Outsourcing portfolio management to the right partner is increasingly seen as an excellent way to cut the burden of CIP management. Taking on the role of co-manufacturer, via a clear, well-documented agreement, brings greater advantages, allowing the firm to input into the investment approach to retain some control over the process, while at the same time effectively de-risking their operations, enhancing compliance and adding significant value to their service offering.

Please remember that the value of investments and the income from them can fall as well as rise, and you may get back less than you invest. Tax treatment depends on individual circumstances and may be subject to change in the future.