One mistyped weighting, entered at the point of a model portfolio rebalance, could cost a DFM up to £900k in remediation expenses. That figure is our own estimate, based on the median 90-day risk exposure across a sample of 25 DFMs, and it is not a number the industry should find comfortable.
It is not hypothetical, though; it’s what happens in practice when a single keystroke is the only thing standing between a model portfolio change and every client invested in that model on a platform. That error then affects every client mapped to that model, on that platform, for as long as it takes someone to notice.
Under Consumer Duty, firms are of course expected to remediate proactively once harm is identified, not wait for a complaint to land. So, the moment an error is caught, a DFM is not fixing one position; they have to work through an entire client population, recalculating losses, and potentially compensating people who never knew anything had gone wrong.
That is why the number climbs so quickly, and it climbs faster still because of scale. The UK’s model portfolio market has passed £214bn in assets, having nearly quadrupled over the past six years, and it is growing faster than the infrastructure underneath it.
There is more money, more platforms, more models, but still the same manual process: someone keying trade instructions into a platform interface, one platform at a time, for every rebalance. Every one of those keystrokes is a chance for an error compensation scenario to become real, and as model ranges expand, the number of keystrokes grows alongside. The risk is scaling too…
Firms have tried to manage that risk with process rather than infrastructure. For example, four-eyes checks, sign-off chains, and additional layers of review before a trade instruction goes anywhere near a platform.
These controls help, of course, but they are also expensive, slow, and still fundamentally reliant on one person catching another person’s mistake before it reaches a client account. They reduce the chance of an error but don’t remove the underlying cause, which is that a model portfolio decision made once still has to be manually re-entered as many times as there are platforms carrying it.
The insurance market has effectively built a product around this exact process failure. Many investment manager PII and E&O policies now carry a Cost of Corrections endorsement, designed specifically to let a firm pay to fix a trade or rebalancing error and make the client whole before it ever becomes a claim or a complaint.
It is, in effect, an admission that errors like a mistyped weighting happen often enough, and cost enough, to warrant their own line of cover. That is arguably the clearest signal of how seriously the industry already takes this risk, even though it has not yet built the infrastructure to reduce it.
Whilst these errors are rarely publicised, they do occur, and it’s not surprising that they do – processing this volume of data is a near-impossible task. Indeed, only last year we saw 2Plan setting aside more than £1m for redress for errors, in part down to a failure to correctly apply the firm’s strategic asset allocation on one of its platforms.
Having insurance won’t be enough to stop the regulator from asking questions, though. The FCA’s supervisory focus has moved firmly towards evidenced outcomes, and a mis-weighted model rebalanced by hand across dozens of platforms is not going to read well in that light, however good the intentions behind the process were.
A firm that can show it has removed manual keying from the rebalance process is in a fundamentally different position, if it comes under FCA scrutiny, than one that is still relying on a checker catching what another person missed.
£900k is a big number for a small mistake. The uncomfortable truth is that the industry has learnt to live with a process that carries a high risk of human error and sees it as just the cost of doing business. But fixing the process is no longer a nice-to-have.
As the cost of potential error rises in proportion to the industry’s soaring AUM, it’s the only way to protect DFMs against the threat of ever-greater compensation bills – and enable them to scale with peace of mind.
Tom Whittle is CEO of Tikker
This article was originally published in: Wealth DFM