APLs shrink, model portfolios boom in choppy conditions

Dealer groups are continuing a shift towards the use of model portfolios across their adviser forces, while Approved Products Lists (APLs) continue to shrink, according to Zenith Investment Partners director David Wright.

The shift towards the use of model portfolios was evident last year, following the market turbulence of 2008. But it’s a trend that’s continuing and being encouraged by continued volatile investment conditions along with an increased focus on adviser compliance and risk management by dealer groups.

Wright said he had observed a greater compliance focus by dealer groups with respect to advisers’ portfolio construction skills and ongoing portfolio management.

“We’ve seen a lot of examples where different advisers within the same group have totally different asset allocation for a ‘balanced’ client,” Wright said.

In addition, some client portfolios had been neglected from a rebalancing perspective — in some cases throwing balanced investors into aggressive portfolios as a result of market fluctuations.

As such, a number of dealer groups are now “looking at more uniform approaches for their advisers”, according to Wright.

Some of the unwieldy APLs of the boom years are also now being rationalised, due to an increasing focus on the legislative requirement for advisers to ‘know’ their investment products.

“Contraction of the number of products on APLs has needed to occur to help that.”

While Wright said there had been a “big contraction” in APL sizes, “that’s from a pretty high base”.

Professional Investment Services (PIS) is one group that has reduced its APL, from 1300 products in 2006 to around 450 today.

“In our view, 400 is still way too many,” Wright said.

Some larger groups, such as PIS, argue they require broad APLs to be able to cater for the needs of significant numbers of clients. Others, such as Count Financial, take a more restricted approach, even across large numbers of advisers and clients.

Wright said some groups thought Zenith’s approach to APL construction was too concentrated. He said dealer groups commonly argue that they require a broad APL for recruitment purposes, with a concentrated APL representing a deal breaker for some advisers.

“Advisers tend not to like to be constrained,” Wright said.

“The funny thing about all of that is that, in reality, the majority of advisers use a fairly concentrated list of managers and products anyway.”