In-house CIP vs outsourced DFM — a decision framework for UK IFA firms

This is a decision that quietly costs firms more than it should. The default — "we'll build it in-house because the margin is better" — is intuitive and usually wrong at the size most IFA firms operate. The default — "we'll just outsource to whichever DFM the back-office firm refers us to" — is operationally easy and often wrong in a different direction. The right answer is segment-by-segment and firm-by-firm, and arriving at it is the work this piece tries to make easier.

The three models, plainly stated

In-house.The firm constructs and rebalances its own model portfolios (or runs bespoke portfolios) using internal investment capability. The firm holds the discretionary permission (or runs the portfolios on an advisory basis with model approval at the client level). Research, fund selection, asset allocation, rebalancing — all owned internally.

Outsourced MPS.A DFM runs a set of model portfolios under its own discretionary permission. The IFA firm advises clients into one of the DFM's portfolios as appropriate. The DFM owns the investment work; the IFA owns the suitability decision and the client relationship. The MPS may sit on or off-platform.

Bespoke DFM.A DFM manages a genuinely bespoke portfolio per client under its own discretionary mandate, with the IFA owning the client relationship and the suitability fit. Typically reserved for HNW segments.

Most firms operating an outsourced model use a combination — MPS for the bulk of the book, bespoke DFM for HNW clients above a stated threshold. The decision in this piece is principally about in-house vs outsourced MPS for the main book.

The case for in-house — and where it actually holds

Three arguments for in-house carry weight.

Margin retention.A firm running its own MPS captures the investment-management fee that would otherwise go to the DFM. At typical DFM-MPS rates of around 25 basis points, on £200m of AUM that's £500,000 a year. The arithmetic is undeniable; what's deniable is whether the cost of capturing it nets positive.

Investment story.Some firms genuinely compete on the investment proposition itself — they have a CIO, a recognisable house view, a track record clients buy. For these firms, outsourcing the investment work would hollow out the value proposition. They have a real reason to keep it.

Speed and adaptation.An in-house investment committee can change its mind on Tuesday and reflect it in the portfolios on Wednesday. An outsourced MPS doesn't move at that pace. For firms genuinely making tactical calls, in-house is the only way to act on them in time.

Where these arguments hold weakly — and they do for the majority of mid-sized IFA firms — the in-house case becomes harder to defend.

The hidden cost of in-house

The £500,000-a-year captured fee gets spent. The line items, conservatively, for a firm with £200m AUM running its own MPS:

• Investment-research capability.Either a senior investment hire (£90k–£140k fully loaded for someone with the chops to run an MPS), part of a senior adviser's time (£40k–£70k of opportunity cost), or external consultant retainer (£30k–£60k).
• Investment-data licences.Defaqto Engage, Morningstar Direct or Adviser Workstation, FE Analytics — pick two. £40k–£80k per year for the licence stack a firm needs to do real research.
• Governance overhead.Investment committee that meets monthly with substance. The opportunity cost of senior time at full IC discipline is £20k–£40k a year of partner time that would otherwise be in front of clients.
• Regulatory permissions and PII.If the firm holds discretionary permission, the FCA capital, reporting and PII implications add real overhead — £15k–£40k a year depending on starting point.
• Trading and platform costs.Trading the portfolios across the client base has a cost, sometimes recharged, sometimes absorbed. £10k–£25k a year for a mid-sized firm.
• Compliance overhead.COBS 9.4 and PROD 4 obligations land harder on a firm that is both manufacturer and distributor of the investment solution. More compliance time, more documentation, larger scope on s.166 reviews.

Totted up, the all-in cost of running a credible in-house MPS for a £200m firm sits comfortably at £200,000–£400,000 a year. The captured £500,000 fee nets to somewhere between £100,000 and £300,000 of additional margin, in exchange for the operational and regulatory overhead of being an investment manager rather than an adviser. For some firms the trade is worth it. For most, it's a wash that comes with a step-change in complexity.

The Consumer Duty layer changes the maths

Pre-Consumer-Duty the in-house MPS calculation was already finely balanced. Post-Consumer-Duty the cost side has hardened. A firm running its own MPS now has to evidence, formally and annually, that the in-house solution offers fair value compared with the alternatives in the market — that the firm's customers are not paying for the firm's investment hobby. The fair-value assessment under PRIN 2A.4 has to land cleanly.

Outsourcing to a competitive MPS — where the DFM is responsible for the fair-value assessment of the MPS itself, and the IFA's fair-value work is limited to the choice of MPS — is materially easier to evidence. The trade-off is real and supervisory teams have been visibly interested in it.

The decision framework

Five questions to ask honestly.

1. Do we have genuine investment-management capability in-house?Not "the senior partner has views." A named investment-decision-maker with the qualifications, the time and the temperament to run a portfolio process. If the answer is no, the case for in-house starts on the back foot.

2. Is investment performance part of how we win clients?If clients pick the firm because of the firm's investment story, in-house may be the only consistent position. If clients pick the firm because of the planning, the relationship or the segment specialisation, the investment story can be told via a well-chosen outsourced solution.

3. Are we above a scale where the fixed cost of in-house investment amortises?Below about £150m–£200m the fixed cost line dominates. Between £200m and £600m it's a close call. Above £600m the in-house case strengthens materially.

4. Do we have the governance discipline to run a real investment committee?A committee that meets monthly with substance, challenges itself, retains independent thinkers, and minutes the challenge. Firms that won't sustain this should outsource and own the governance of the outsourcing decision instead.

5. Can we evidence fair value annually against the outsourced alternative?If the answer is no, or if the annual exercise would be embarrassing, that's a strong signal the in-house solution exists for the firm's reasons rather than the client's.

Three or more "no" answers and the outsourced route is the safer call. Five "yes" answers and the in-house case is real. Mixed answers usually point to a hybrid — outsourced for the standard segments, in-house or bespoke DFM for the differentiated HNW segment where the firm's edge actually lives.

The hybrid model that most firms end up in

In practice, the firms that arrive at a stable answer often end up with: outsourced MPS for the mass-affluent and standard HNW segments, bespoke DFM for the genuine HNW segment where bespoke is the right answer, and in-house only for any segment where the firm has a genuine investment story worth telling. The CIP then becomes a governance overlay on the choice of solution per segment, rather than a list of in-house portfolios.

The biggest mistake we see is firms that drifted into in-house ten years ago, when the cost line was lower and the regulatory bar was lower, and haven't re-run the maths since. The honest re-evaluation is uncomfortable but it's the work Consumer Duty essentially mandates.