Is unitisation right for your client portfolios?
By Martin Ratcliffe, Associate Director – Business Development at IFSL Fund Services
An increasing number of wealth managers and discretionary fund managers are recognising the benefits of unitising client portfolios into a fund structure. There are a number of advantages for the client, including tax benefits, and for the business, including operational cost savings.
It is not, however, the right answer for everyone and there are a number of key questions that those running a business should address when they are considering the idea.
The first step is to weigh up the benefits and make certain it is the most suitable option for your clients. This includes considering existing alternatives in the marketplace.
Level of assets
The next question is what level of assets would you be unitising? The size of the fund from day one is important. In our eyes, a business needs to have a collective minimum of £150m-£250m in investors’ portfolios to make an Open Ended Investment Company (OEIC) structure a viable option. Below that, the fixed or minimum costs that come with running a fund, such as depositary and auditor’s fees, will have an inordinate effect on portfolio performance. While a fund with a much lower overall figure may still be viable, we believe a higher level of assets helps ensure a healthy start.
Within the OEIC, the assets in each of the different risk-graded portfolios will in many cases become an individual sub-fund. We would suggest around £25m as an appropriate starting level of assets to make each sub-fund viable. Where that level of assets is not available or when a business requires a greater number of risk-profile options, blending sub-funds can increase the number of risk-profile options without requiring a separate sub-fund for each.
Nature of holdings
The nature of the assets in client portfolios is another important consideration. Liquidity is one of the advantages of a fund structure. However, UCITS regulations mean some more specialist or illiquid assets cannot be held in a fund. Direct investments in property or gold are not eligible, for example.
Where a business is offering clients highly bespoke portfolios that include assets not eligible for a fund structure, or those that are individual to them – for example shares in a particular company they have an association with – then there is the option for these to be held separately, alongside unitised portfolio holdings. Unitisation should not be about forcing investors into narrower asset universes; it is about creating efficiencies that, where appropriate, will benefit them.
If, having considered such questions, unitisation still looks an attractive option, the benefits for your clients and your business can be considerable.
Unlike transactions in an individual portfolio, the buying and selling of assets within a fund structure are not liable for Capital Gains Tax. So rebalancing the portfolio does not trigger a CGT event. That only comes when the client sells their investment. This not only reduces the administrative burden for the client and your business, it allows for effective tax planning. Similarly, while investment management fees for segregated portfolios are liable to VAT, those on assets in a fund structure are not. In addition, the client benefits from the regulation associated with funds, the independent governance of a good Authorised Corporate Director (ACD) and from transparent, published performance.
Companies benefit from reduced administrative costs, efficiencies from rebalancing a single sub-fund rather than a large number of individual portfolios and the opportunity to market funds to a wider audience, potentially adding value to their business. Unitised portfolios also dovetail effectively with robo-advice, providing clearly defined, consistent and cost-effective investment solutions that can be made available to individual investors with comparatively small overall portfolios.
One traditional objection to unitisation is clients no longer feel they have their own portfolio. However some propositions now offer a ‘look-through’ facility, so investors can view their exposure to all the underlying holdings in the fund.
While unitisation will not be the solution for everyone, for many there are significant advantages, particularly now the costs of operating a fund and having it hosted on a full-service online platform need be no more than those associated with running segregated portfolios.
A version of this article first appeared in the June 2017 issue of Portfolio Adviser.