Rebuild the cost stack before you defend an in-house model portfolio

The margin argument for running model portfolios in-house is easy to make and rarely re-tested. A fair comparison with an outsourced MPS needs the full cost of being an investment manager: research capability, data licences, committee time, permissions, trading and the wider compliance scope. Where a firm manufactures its own solution, the FCA's price and value rules in PRIN 2A.4 require it to assess fair value, which makes the exercise hard to avoid. This piece sets out how to build the stack honestly and what to do with the answer.

The decision to run model portfolios in-house is usually made once. After that it's inherited, and each year's review asks whether the portfolios are working rather than whether the firm should still be the one running them.

I think that second question deserves a proper answer every few years. Not because in-house is wrong. For some firms it's plainly right. But the arithmetic behind the original decision changes, and a firm that hasn't re-done it is defending a number nobody has checked.

The margin is the easy half

Our in-house CIP vs outsourced DFM framework puts typical discretionary MPS charges at around 25 basis points. On £200m of assets that's about £500,000 a year the firm could, in principle, keep by running its own portfolios.

It's a real number. It's also the only number most internal cases start with.

Then the other half

The same framework lists what that captured fee has to pay for, and I'd use its categories as the skeleton of any rebuild:

Cost line	What to include
Research capability	A dedicated investment hire, or the share of a senior adviser's time spent on portfolio work, costed at what that time would earn in front of clients
Data licences	The research and fund data tools the committee actually relies on
Governance	Committee preparation and meeting time for every member, at a realistic rate
Permissions and PII	Any extra capital, reporting and insurance cost if the firm holds discretionary permission
Trading and platform	Dealing costs across the client base, whether recharged or absorbed
Compliance scope	The additional product governance and suitability work that falls on a firm acting as manufacturer as well as distributor

For a firm of around £200m, the framework estimates the full cost of a credible in-house MPS at £200,000 to £400,000 a year, leaving somewhere between £100,000 and £300,000 of extra margin. That range is wide on purpose. Where your firm sits in it depends almost entirely on how honestly the partner time is priced.

And partner time is the line that goes missing. A monthly committee that meets properly, with papers read in advance and challenge recorded in the minutes, costs senior hours. If those hours are treated as free, the in-house case always looks better than it is.

Why the value rules make this unavoidable

Where a firm is the manufacturer of its model portfolios, the Consumer Duty's price and value rules apply to it directly. PRIN 2A.4.2 in the FCA Handbook requires a manufacturer to ensure its products provide fair value to retail customers in the target market, and to carry out a value assessment and review it regularly. PRIN 2A.4.8 lists what that assessment must consider, including the benefits and quality of the product, its limitations and the expected total price the customer pays.

Put those alongside the cost stack and the question becomes specific. Does the client get something from the in-house portfolio, in quality or benefit, that justifies what they pay compared with what a well-chosen outsourced MPS would offer? If the honest answer is that the main beneficiary is the firm's margin, the value assessment will be uncomfortable to write.

The framework makes a related point: where the firm uses an outsourced MPS, the discretionary manager carries the value assessment for the portfolios themselves, and the adviser firm's work centres on why it chose that solution for that segment. That is a narrower thing to evidence.

What to do with the answer

The framework suggests scale bands as a rough guide: below about £150m to £200m the fixed costs tend to dominate, between £200m and £600m it's a close call, and above £600m the in-house case strengthens. I'd treat those as a starting point for the conversation rather than a verdict.

The answer rarely comes out all or nothing. Often it points to a hybrid, with outsourced models for the standard segments and in-house or bespoke management kept only where the firm has genuine investment depth that clients actually choose it for.

Whatever the result, write it down. The rebuilt cost stack, the comparison, the value reasoning and the decision belong in the committee minutes. The next time someone asks why the firm runs its own portfolios, the answer should be a document, dated, with the arithmetic in it.

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