Platforum: Adviser investment distribution is becoming a winner-takes-most market

Advisers are rapidly narrowing the range of investment strategies they recommend to clients, and they are outsourcing more and more to investment managers, according to Platforum’s latest research, UK Financial Advisers: Investment Distribution.

This concentration of investment decision-making is one of the most significant shifts in the advice market over the past five years.

The drivers are familiar: efficiency; regulatory pressure arising from the Consumer Duty; and a greater focus on financial planning. Together, these changes are reshaping how investment distribution works.

This partly reflects the changing structure of the advice market. Consolidation has created larger advice firms that control an increasing share of advised assets, replacing a fragmented market in which individual advisers were much freer to make investment decisions.

As the advice market consolidates, investment selection has become concentrated in the hands of a smaller number of central decision-makers.

Advisers are using fewer investment strategies

A clear sign of this shift is the growing simplicity of many firms’ investment propositions. Advisers have been gradually reducing the range of strategies they recommend in their centralised investment propositions (CIPs).

Instead of offering clients a broad range of options, advisers increasing select from a few core solutions, such as third-party model portfolios or multi-asset funds. We found that 41% of advisers now use a single investment strategy to underpin their core investment proposition – compared with just a quarter (25%) as recently as 2021.

Outsourced MPS alone accounts for 29% of advised assets, more than double the 12% recorded in 2021

The upside of this simplification is operational efficiency, strengthened oversight and easy demonstration of suitability and value for clients.

But it means that a fast-growing share of client assets is ending up in fewer investment strategies. This potentially has profound implications for the whole value chain – but especially asset managers.

Outsourcing continues to gather momentum

This is all happening at a time when advisers are focusing more on where they add the most value for their clients: financial planning; tax planning; and building client relationships. Specialist investment partners are then left to manage clients’ portfolios.

The dominant investment strategy in the advice market is discretionary models (MPS), which now represent 42% of advised assets. Outsourced MPS alone accounts for 29% of advised assets, more than double the 12% recorded in 2021.

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Bespoke portfolios – advisory and discretionary – have continued to decline. Many firms now view bespoke portfolio construction as hard to justify against the scalability, governance and cost-efficiency of MPS. The Consumer Duty has only magnified that trend.

Distribution is getting more concentrated

The concentration of portfolio management decision-making has major implications for asset managers and other product providers, who find that they need to focus their sales and marketing efforts on fewer decision-makers and centres of influence.

Larger advice firms can also use their size and AUA to negotiate closer relationships with investment providers and to secure tailored solutions, pricing and support. For providers, these partnerships can unlock significant and often sticky asset flows.

As decisions concentrate into fewer hands, so do the risks – for advisers and their clients

But with advice firms increasingly concentrating assets among a smaller number of partners, there are fewer opportunities for providers to secure a place on these panels.

Distribution of funds is becoming a ‘winner takes most’ market in which scale, credibility, pricing, operational support and strategic alignment are at least as important as investment performance.

Advisers gain more efficiency, better governance and greater consistency. But as decisions concentrate into fewer hands, so do the risks – for advisers and their clients.

Mariam Pourshoushtari is an analyst at Platforum. For more information on Platforum’s report, UK Financial Advisers: Investment Distribution, please get in touch