Model portfolios used to combat risk

Model portfolios are becoming an increasingly popular investment advice option in an environment where risk mitigation is a priority for dealer groups.

"I think there's a chance licensees might have found themselves in a situation where they're having to be defensively creating them," said Matrix Planning Solutions managing director Rick Di Cristoforo.

Select Asset Management chief investment officer Dominic McCormick said the shift is also being prompted by regulatory concerns and the need for greater coherence in client services.

"[It's] just ensuring that you don't have advisers going off and dramatically skewing portfolios to certain risky types of products. It's one thing to control an Approved Product List [APL], but you can still make a mess of client portfolios by putting the wrong amount in different types of asset classes," he said.

"It's lower risk from both an investment and a business perspective for the dealer group and the adviser."

While he is "relatively ambivalent" about model portfolios, Di Cristoforo acknowledged a progressive increase in interest from advisers, noting they also add efficiency to advisers' practices.

Shadforth Financial Group chief executive Nick Bedding agreed dealer groups would increasingly use model portfolios because of problems with some products, "massively diverse" APLs and a huge variance in the skills of advisers.

"The advisers are not across it ... In many cases, even the researchers are not across all the products on their [APL], and they're not properly controlling how those products are used," Bedding said.

However, Fiducian Financial Services head of financial planning Alan Hinde said while many groups introduce the portfolios to "put a boundary around advisers", there are inherent risks to consider.

"You've got to question if advisers still know the product, or whether they're just outsourcing that entirely to the model portfolio construction," Hinde said.

Because of the limited nature of the model portfolios, Bedding warned they could be problematic. "You need to be particularly careful with underlying fund and product selection if you're going to follow that model portfolio approach."

Glen Franklin, associate director, Zenith Investment Partners, said issues arise when groups veered away from their advice.

"It's certainly not a 'push the button' solution from our end. There's a hell of a lot of work that goes into building these portfolios," he said.

"The reason we do that is to save the adviser the effort - it doesn't make a lot of sense for the adviser to have to do all that sort of work for all of their individual clients when they can leverage off our research and service of model portfolios."