Model portfolios make a poor alternative to multi-manager funds for the majority of investors, according to Cazenove Capital Management.

As advisers prepare for the advent of the Retail Distribution Review (RDR), there has been a growing trend among IFAs to outsource their investment proposition. Discretionary fund managers (DFMs) have been launching risk-rated model portfolios to take advantage of this shift. 

However, Cazenove Capital Management, which offers both bespoke and multi-manager solutions for outsourced clients, says the latter offers a more suitable solution for the mass market.

Unlike model portfolios, Cazenove says multi-manager funds offer a more cost-effective and tax-efficient method for advisers to access specialist fund managers, particularly after European courts ruled services provided by DFMs are subject to VAT, potentially adding 20 per cent to the total cost.

Additionally, Cazenove says it is not possible to build an effective bespoke portfolio at an investment level below £200,000. 

Rather than roll out a range of risk-rated model portfolios in the platform space for investments below this level, the firm chose to market multi-manager funds.

"We don’t offer [model portfolios] as it stands today because if operated on a platform it would restrict our investment universe," said Robin Minter-Kemp, head of investment funds at Cazenove. 

The firm pointed out it would not be able to access hedge funds, structured products or soft closed funds via a platform.

However, Cazenove did not rule out the possibility of marketing its tailored DFM service via a platform in the future.

"The important thing to remember is that it’s not one size fits all. Advisers will have segments of different clients and they may use different approaches for each," Minter-Kemp added. 

"Outsourcing isn’t the best word and there is so much hype around the word at the moment. There are many advisers that do their own investment management and they do a great job."

"There are others that may segment a certain group of clients and not others and then there are some which may choose to outsource everything." 

"But outsourcing is the wrong word. [Advisers] still have responsibility for their client and they still add value through their financial planning requirements and they still have the mammoth task of DFM and multi-manager due diligence." 

Earlier this week, advisers pointed out a divide between IFAs' view of risk and a traditional discretionary approach to equity investing. 

DFM services came under scrutiny from the FSA after it issued final guidance in July on the use of centralised investment propositions.

The regulator warned against "shoe-horning clients into outsourced offerings" and stressed advisers should continue to carry out proper and ongoing due diligence when turning to any outsourced solution.