Model portfolio fee structure ‘wrong’
Expert warns that prices are too high and somebody will have to take a haircut to get to justifiable fees
Model portfolio providers should charge a flat-rate fee, rather than on a percentage point basis, while total fees for the outsourced solution need to come down, claims Mark Polson of Lang Cat Financial.
The platforms and pension industry specialist says that as model portfolios are not a volume-based business, he does not see the logic in charging a basis point fee.
On the pricing of model portfolios in general, Polson says, “It’s too much, some people have to take a haircut.” He cites the example of using a Cheviot model portfolio on the Nucleus platform which, including VAT, trading costs and DFM charge, costs up to 2.21% before the adviser has added their charge.
“Pricing is absolutely crucial in this market, the regulator wants to see a strong argument that the basis point fee being charged is worthwhile. If it isn’t then chaos ensues,” he adds.
Polson says that with an increasing focus on fees, a greater number of model portfolios are using passives to reduce charges, but the more they do this, the more chance they have of becoming a closet tracker.
“It’s an area that definitely needs keeping an eye on,” he added.
Polson also targeted the belief that the process of the adviser outsourcing client investment decisions to the likes of a model portfolio, DFM or other solution de-risks an adviser’s business.
“One is as risky as the other, it’s just a different risk and it’s down to the adviser to decide what risk they want to handle. Outsourcing is nothing like the easy solution.”