Discretionary fund management: prioritising value over cost
More on Discretionary Management
- Lloyds bolsters wealth division with senior appointments
- Morningstar confirms discretionary portfolio launch
- Brown Shipley hires Roger Clark as wealth head
In focus: Outsourcing Investments
There’s a growing movement within the industry suggesting that investors are being taken advantage of by fund management companies with far from transparent charging structures. In recent months fund managers have been accused of displaying similar tactics to low-cost ‘no frills’ airlines; misleading investors about the total costs they pay for the management of their investment.
And in many ways the fund management industry can be worse than a low-cost airline; at least the airline customer knows how much they have paid before boarding the plane, whereas without an industry-wide standard approach to charging the true cost of funds can remain opaque to investors throughout the life of the investment.
Of course transparency is critical. Advisers have to be able to reassure their clients that they understand exactly what they are paying for. Investors should have a fair idea of how much they are paying, but also feel that their investments are being managed to deliver the very best returns for them, not being managed to help line the fund manager’s pockets. By using a discretionary fund management solution, effectively outsourcing investment decision-making to dedicated managers actively monitoring the intrinsic value of the underlying investments, advisers should at the very least feel they a strong level of reassurance on both counts.
But in our view, the debate on pricing transparency is missing the bigger picture. The reason that everyone is in a muddle about transparency and unfair charges is that the industry is seen to be making it really hard to assess ‘value for money’. But most of the industry, and most investors, don’t even know what that is.
The cost of an investment is of course important, but it should never be the most decisive factor. When evaluating an investment only two things really matter. First, that it delivers on the returns that the investor wants (i.e. it delivers a better performance after costs than the benchmark). Second, that it achieves these returns in the way that the investor expects (i.e. without taking excessive risks to get there).
When Octopus was developing its discretionary fund management solution, Octopus Portfolio Manager, we commissioned an independent market report on discretionary solutions using Defaqto, a leading UK independent financial research company specialising in rating, comparing and analysing financial products. In the report, Defaqto recommended financial advisers account for:
• The initial charge
• The portfolio management charge
• The Annual Management Charge (AMC) and/or Total Expense Ratio (TER) for underlying funds utilised within the client’s investment portfolio
• The policy on the share classes utilised within the client’s investment portfolio (retail/institutional)
• The policy on fund charge rebates on underlying funds utilised within the client’s portfolio
• Any transaction charges