Co-manufacturing: good, bad & ugly

For UK financial advisers only

A lot has changed since Henry Cobbe called for greater Customisation of Model Portfolios by financial advisers back in 2018.  Industry has heeded the call with Custom MPS being the fastest growing sub-set within the rapidly growing MPS market.
Henry also outlined why he thinks Advisers, not DFMs, will win the race in Managed Portfolio Services (MPS) in this podcast with FT Adviser in July 2022.

Over 90% of the approx £2bn in AUM managed by Elston Portfolio Management is in adviser-defined Custom mandates designed by Elston Consulting, who are leaders in this field.  This excludes the approx £4bn in AUM of Elston Consulting's other DFM clients including a national advice firm.

Co-manufacturing is soaring in popularity: in this workshop, Henry Cobbe explores what is it, and what are the risks in this article.

Co-Manufacturing of Model Portfolios: The Good, the Bad, and the Ugly

By Henry Cobbe, Director & Head of Research, Elston Consulting

We see co-manufacturing of a discretionary Managed Portfolio Service (MPS), as a strategic opportunity for financial advisers to take control of their investment proposition, enhance business value, and reduce operational risk.

At Elston, we’ve been at the forefront of this development since 2018, helping firms design and deliver custom strategies that align precisely with their target market. Co-manufacturing, when done right, is about building tailored solutions for an adviser firm not off-the-shelf cookie-cutter products. It’s the difference between buying a ready-made suit and having one customised to fit both sizes and preferences. And for firms serious about their investment proposition, retaining ownership of the proposition, whilst transferring out the operational heavy lifting is the ideal solution.  It’s customised, scalable, and cost-effective for firms’ clients. 

Co-manufacturing is defined in PROD as any party involved in the design or manufacture of a product or service.  There’s a spectrum of involvement: the key criteria is the degree of impact on client outcomes.  The regulatory requirement on co-manufacturers is to have a written agreement in place with manufacturers outlining who does what.

As a result there are more and more co-manufacturing arrangements between adviser firms and discretionary Managed Portfolio Service (MPS) providers.  But not all co-manufacturing arrangements are created equal.  In our view, there are the good, the bad, and the ugly.

The good arrangements are open architecture. The adviser defines the strategy, the investment manager and manages it. If the investment manager doesn’t deliver on objectives or value for money, the adviser has the option to remove and replace them. This way, as an adviser, you retain control, flexibility, and alignment with your brand and beliefs. That’s how we operate at Elston where we consulting to over £6bn of assets, and have approx. £2bn in strategies managed by Elston Portfolio Management of which 90% is in adviser-defined custom strategies.

The bad are captive arrangements. These often involve joint ventures where the adviser is locked in. You want to change provider? Tough. You’re tied to the JV. That’s not independence, it’s dependency. And it undermines the adviser’s ability to act in the client’s best interest, in our view.  So whilst these arrangements can be commercially interesting, they limit choice and constrain flexibility.

The ugly arrangements involve fee-sharing. It’s banned in the fund world since RDR, and rightly so. Why should MPS be any different? We believe this practice is not only unethical but will be scrutinised in the upcoming FCA review of Managed Portfolio Service providers under the Consumer Duty.

​In our view, the biggest winners in the shift to Managed Portfolio Services (MPS) is advisers.  They’re taking control of their proposition, and then building their own solutions by insourcing capabilities from firms like ours, or launching their own DFM businesses with our help.  They want solutions that align to their client base with oversight and input, not generic products built for the mass-market where they have no say. The big fund houses may launch Managed Portfolio Services, but without adviser alignment, they won’t necessarily progress.

Ultimately, co-manufacturing is about empowerment. It’s about advisers building solutions they want for their clients and becoming price setters, not price takers in the value chain. It’s about aligning investment strategy with client outcomes. And it’s about doing things properly with clarity, transparency, and integrity.

If you’re an adviser considering your next move, ask yourself: are you outsourcing value, or insourcing control? Because in the Managed Portfolio Service (MPS) revolution, the winners will be those who build solutions aligned for their clients  needs, partner wisely with their selected investment manager, and never compromise on what’s right for their clients.

We look forward to continuing this revolution that we helped start in 2018.