Model Portfolio Services (MPS) have become an increasingly important part of the UK investment market, offering access to professionally managed portfolios through financial advisors and investment platforms.
A structured approach to investing
An MPS can provide a structured and comparatively cost-efficient way to invest, combining asset allocation, fund selection, ongoing monitoring and portfolio rebalancing within a defined investment mandate.
Whether an investor is building towards retirement, investing through an ISA or managing capital in a General Investment Account, understanding how an MPS works can help support an informed discussion with a financial advisor.
What is a Model Portfolio Service?
A Model Portfolio Service is a range of professionally managed, ready-made investment portfolios designed for different objectives and risk levels. Investors commonly access the service through a financial advisor and hold the selected model on a third-party investment platform or, in some cases, directly with the discretionary fund manager (DFM) responsible for managing it.
Each portfolio contains a fixed set of holdings, asset allocation and an investment philosophy. Investors in the same model receive the same portfolio decisions, and when the manager changes the model by adjusting equity exposure or the bond allocation, the change is generally implemented across accounts invested in that model. The investor participates in a shared strategy rather than receiving a portfolio designed solely for them.
This standardisation allows investment management to be delivered consistently and at scale, which can make it more accessible than a fully bespoke service. The trade-off is that the holdings are not normally adjusted for each investor's individual tax position, preferences or specific restrictions unless the provider offers a suitable alternative model.
Risk-aligned portfolios
Most MPS providers offer a range of portfolios positioned along a risk spectrum. Labels vary, but models are often described as cautious, balanced, adventurous or by a numerical risk rating. Each model will usually have a different mix of assets and an expected range of volatility.
When giving regulated investment advice, a firm must obtain the necessary information to assess suitability. This includes the client's financial situation and ability to bear losses, investment objectives and risk tolerance, and relevant knowledge and experience. Other factors, such as investment timeframe, liquidity needs and tax position, may also be important.
Risk-profiling tools and recognised frameworks can help an advisor compare a client's assessed risk with a model's stated mandate, but they do not replace professional judgement. Suitability must be considered for the individual client, both when the recommendation is made and, where an ongoing advice service applies, at subsequent reviews.
Active, passive or blended?
MPS portfolios commonly use active funds, passive funds or a combination of the two. The most appropriate approach depends on factors including cost, investment beliefs, diversification, implementation and the manager's ability to deliver the intended outcome.
- Active MPS portfolios use funds whose managers select securities intending to outperform a benchmark or achieve a particular outcome. They usually carry higher charges and introduce manager-selection risk: even a capable manager may underperform, particularly after fees.
- Passive MPS portfolios use index-tracking funds or exchange-traded funds that seek to follow a specified market index. Charges are often lower, although index design, tracking method, trading costs and tracking difference (the gap between a fund's actual return and the index it follows) still affect results. The manager's decisions are concentrated mainly in asset allocation, fund selection and rebalancing.
- Blended MPS portfolios combine active and passive funds. A manager may use lower-cost index exposure in some markets and active strategies where it believes additional skill or flexibility may be worthwhile. This can offer a compromise between cost control and active decision-making, but it does not guarantee better performance.
No one approach is consistently superior in every market or for every investor. An advisor should consider the portfolio's objective, its total cost, the investor's timeframe and preferences, and how the strategy fits within the wider financial plan.
The benefits for investors
How an MPS can support financial planning
Investment management and financial planning are related but distinct disciplines. By delegating day-to-day portfolio decisions to an MPS provider, a financial planner can focus more attention on the client's goals, cashflow, tax planning, protection needs, retirement strategy, estate planning and response to changing circumstances.
This division of responsibilities can improve clarity: the DFM manages the model within its mandate, while the adviser remains responsible for the suitability of the recommendation and for integrating the investment strategy into the client's wider financial plan.
The arrangement works best when responsibilities, costs, review arrangements and communication are clearly understood. Outsourcing investment management does not remove the need for appropriate due diligence or ongoing client review where these services have been agreed.
General Investment Accounts and Capital Gains Tax
Using an MPS within a General Investment Account (GIA) requires particular attention because model changes may result in disposals of the underlying funds. Those disposals can realise gains or losses for the investor in the tax year in which they occur.
In a multi-asset fund, trading between the fund's underlying investments does not normally create an immediate personal CGT disposal for the investor. A personal gain or loss may arise when the investor sells or otherwise disposes of units in the fund. The amount depends on the disposal proceeds, allowable costs, previous transactions, available losses, reliefs and the investor's wider tax position.
Within an MPS held in a GIA, rebalancing and manager changes may crystallise gains or losses more frequently. In some circumstances, this may help an investor use the annual exempt amount, but it may also create taxable gains above the available exemption. The outcome is not automatically advantageous and should not be described as simply 'pay as you go'.
The annual exempt amount applies to an individual's overall net gains for the tax year after allowable losses and relevant reliefs. It cannot be carried forward if unused. Tax management therefore needs to consider all disposals, not just those made within the MPS, and tax rules and rates may change.
For some investors, the investment-management benefits may outweigh the additional tax administration or potential tax drag; for others, a tax-aware model, an alternative structure or a different investment approach may be preferable. This should be assessed individually, with professional tax advice obtained where appropriate.
MPS compared with a bespoke DFM service
An MPS applies the same model to all investors who select it. A bespoke discretionary service is designed and managed around an individual client's mandate and may be able to accommodate specific tax circumstances, income requirements, ethical preferences, legacy holdings or investment restrictions.
Bespoke services commonly require a higher minimum investment and may carry higher charges. The additional flexibility may be valuable for clients with more complex needs, while an MPS may be appropriate where a standardised portfolio adequately meets the investor's objectives and circumstances.
Risks and costs to consider
- The value of investments can fall as well as rise, and an investor may get back less than was invested.
- Returns are not guaranteed, and inflation may reduce the real value of capital and income.
- A model portfolio is not normally tailored to the investor's individual holdings or tax circumstances.
- Underlying funds may carry market, credit, interest-rate, currency, liquidity and concentration risks.
- Model changes may not be implemented at exactly the same time or price on every platform.
- Charges reduce returns and should be considered in total rather than in isolation.
Conclusion: A useful option, not a universal answer
An MPS can offer a clear and structured route to professional portfolio management, combining diversification, ongoing oversight and rebalancing within a defined mandate. It can also allow the financial advisor to concentrate on the wider planning decisions that are specific to the client.
However, an MPS is neither individually bespoke nor automatically suitable. Its investment approach, risk level, service arrangements, costs, tax implications and limitations should be considered alongside the investor's objectives, financial circumstances and capacity for loss.
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DisclaimerCrowe Financial Planning UK Limited is authorised and regulated by the Financial Conduct Authority (FCA) to provide independent financial advice (FRN 185323). This insight is approved for use by Crowe Financial Planning UK Limited on the date issued. The information on this page is for information purposes only, based on our understanding of legislation and market practice at the time of writing. It does not constitute financial, legal or tax advice, and appropriate professional advice should be sought before any course of action is pursued. Where professional financial advice is sought, fees will apply and will vary depending on the complexity of the individual case. Any advice will be based on personal circumstances, and as with all financial planning, outcomes will depend on a range of factors that cannot always be predicted or guaranteed. The value of investments can go down as well as up and is not guaranteed; investors may not get back the amount originally invested. Past performance is not a guide to future performance. Tax treatment depends on individual circumstances and is subject to change. The FCA does not regulate Trusts, Tax or Estate Planning. The division of pension assets on divorce involves both financial and legal considerations, independent legal advice should be sought alongside any financial planning guidance. Please be aware that clicking links to third-party websites will take you away from the Crowe Financial Planning website. We are not responsible for the accuracy of information contained within linked sites. |
