In conversations with dozens of DFMs, platforms and advice firms over the past year, our research has shown that on average, it takes an investment operations professional 3.9 weeks for a model portfolio rebalance to be instructed, implemented and confirmed across a firm’s full range of platforms, and some of the DFMs we speak to tell us it stretches closer to seven weeks once a platform throws up an exception. Not days, but weeks!
Anyone running investment operations at a DFM will probably not be surprised by this figure but for an industry that has spent a decade talking about straight through processing, that number should stop us all in our tracks.
The model portfolio market has not stood still over the last few years despite this operational friction persisting. Platform MPS assets in the UK have passed £214bn, having nearly quadrupled over the past six years. There are now around 80 mainstream MPS providers available on platforms and competing for advisers’ attention - with new market entrants all the time - and Tatton’s chief executive Paul Hogarth has predicted the market will reach £500bn by 2030. Growth of that scale should be a good news story. However, it is exposing exactly how much of the infrastructure that powers the model portfolio market was never built to cope.
The mechanics of a rebalance explain why. A DFM decides to make an adjustment or reweight a model or underlying holding and that amendment has to be re-created, platform by platform, often through nothing more sophisticated than someone keying trade instructions into a platform’s user interface.
In addition, there is no consistent way for DFMs to obtain management information from platforms in order to understand the trades required, and the trades themselves are then keyed in manually, generating the operational risk and the “four eyes” checking costs that come with it. This is the reality of what happens when a decision made once has to be manually reproduced across an unlimited number of platform environments, each with its own format, its own quirks and its own timetable. This problem really compounds when you have white-labelled solutions of the same model or if you’re a consolidator with more than one legal entity and therefore multiple platform accounts.
Criterion, the not-for-profit body that sets data integration standards across UK financial services, has been explicit about why this creates risk as well as delay.
However, platforms currently have little commercial incentive to fix the process and no individual DFM alone carries enough weight to force change.
The costs go well beyond the operational headache. Despite the best efforts of most DFMs, by the time a rebalance has finally worked its way through every platform, the market conditions that justified it have often moved on: the strategy the investment committee signed off may no longer be true to the rationale behind it, and the alpha being sought has already gone. Best execution obligations sit uneasily alongside a process that can take the best part of a month or more: a DFM cannot credibly claim to have acted in every client’s best interest on a trade that is still working its way through platform twelve thirty days after platform three was done.
None of this is free for the firms involved either. They are spending too much time and money propping up an inefficient legacy process, at the exact moment they most need to be nimble: a DFM that cannot rebalance quickly cannot risk-manage a choppy market. Global market events happen far faster than DFMs can get a model update live and accurately weighted across every platform that should carry it.
There are human costs to all this too. The instinct to shorten the rebalance window can lead to a rushed process, which is exactly when mistakes happen, and added pressure is put on the people executing it. Factsheets that no longer reflect a portfolio's actual make-up jar with Consumer Duty's requirement for communications to be clear, fair and not misleading. For clients in decumulation, the stakes are even higher as they unknowingly run the risk of being left in the original model and being out of step until the next rebalance or being unable to take any withdrawals during the ‘blackout’ period. A four to seven week rebalance window makes the blackout longer and the client more exposed.
Indeed, the part of this that should concern all of us most is what happens to the end client while that clock is ticking. When a rebalance is under way, a DFM needs to know in real time which instruments are available on which platform. In practice, discovering that a fund is gated, delayed or simply unavailable on one platform tends to happen mid-process. One DFM described a version of this that will likely feel familiar to plenty of others: having verified a fund was available on a platform, they found, by the time the rebalance had worked through the cumbersome draft and check stages and come to trade, that the platform had removed it. The whole sequence then has to start again for that one line, which may exist across the whole model range, while the rest of the rebalance keeps moving without it. At scale, those exceptions multiply, execution windows stretch, and the risk of inconsistent outcomes across platforms increases. What clients should not have to accept, without a clear and defensible explanation, is a difference in performance, caused not by investment decisions but by outdated infrastructure and unevolved workflows.
This isn’t just a limitation of the underlying tech - it really is a client outcome problem, and the FCA has been increasingly explicit that firms will need to evidence it as such. Consumer Duty’s fair value requirements do not stop at price and the regulator’s own review of fair value has pushed firms towards needing to demonstrate, not merely state, that clients are receiving good outcomes on an ongoing basis. A model that drifts out of line on one platform for three or four weeks longer than on another is a very real fair value problem and it is likely to come under more scrutiny as the FCA’s supervisory focus shifts further towards evidenced outcomes rather than good intentions.
So why has so little changed, given how well understood the problem is? Because, as with the rekeying debate more broadly, everyone in the chain is trying to solve just their own part of it. Platforms optimise their own onboarding, DFMs build workarounds for the platforms they use most, and advice firms absorb the reconciliation burden because there is no realistic alternative. Each of those responses is understandable but they don’t address the structural cause, which is that a single investment decision has no standard, shared way of reaching every platform it needs to reach at the same time.
There is precedent for what collective fixes can achieve in our industry but I suspect regulation will be the trigger here rather than commercial goodwill. The FCA has already shown its willingness to look past process and ask firms to prove outcomes. A 3.9 week rebalance, repeated across an industry managing an ever-larger share of retail investors’ money, will not avoid that scrutiny indefinitely. The only real question is whether the industry gets ahead of that moment by building improved infrastructure now or waits to be told to.
Tom Whittle is CEO of Tikker
This article was originally published in: Wealth DFM