InvestmentsOct 28 2014

Backing for Mifid charge changes as study exposes disparity

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Changes under the current drafting of a major piece of European financial services legislation which would shake-up charging disclosure have been backed by transparency campaigner Gina Miller, after a study exposed wide disparity in the total costs to clients by wealth managers.

Speaking to FTAdviser, Ms Miller, founder of wealth manager SCM Private, said that while she is supportive of enhanced disclosure, the current system does not work as a whole swath of costs are not disclosed at outset to prospective investors, undermining competition.

As it currently stands, basic administration and custody charges need to be disclosed prior to a fund or product purchase and are typically presented in a total expense ratio, whereas transaction costs are often not disclosed until after a sale and usually separately.

Under the current drafting of the second iteration of the Markets in Financial Instruments Directive, all costs would need to be disclosed, at outset, in a single aggregate figure. The rules still a way to go before becoming law and are therefore subject to change.

Ms Miller said the total ‘all in’ costs for a typical portfolio should be disclosed prior to the sale in order to create a level playing field.

She said: “What we have currently is if you want to invest specifically in one fund, the focus is still that line of cost – but there is the platform charge, the adviser charge – there should be one place for all costs at all levels for funds and pensions.

“Unless you add all the different cost layers together it is very difficult to compare – you need to know what you are paying for everything that is under the bonnet- we need that with pensions and funds.”

Her comments came following release of data compiled by broker Numis, first published in FTAdviser sister title FTfm yesterday (27 October), which showed wide disparity in charges when all costs were taken into account (see table below).

For example, on a one-year basis costs portfolios at St James’s Place could costs as much as 7.48 per cent, while a similar one-year holding at Towry or Coutts would cost 4.2 per cent or 3.77 per cent respectively.

This reflects in part up front fees - over a 20-year holding period which might be more typical the SJP total price falls to 1.94 per cent - but for many firms the aggregated fees presented by Numis would be significantly above headline rates.

The data attempted to present a view of ‘all in’ charges for a typical £120,000 portfolio, but did not include other costs such as exit fees.

Advisory/discretionary managersTotal basis points
Barclays Wealth Discretionary 213
Brewin Dolphin Discretionary (fee model only)266
Coutts (1 year holding period)377
Coutts (3 year holding period)310
Coutts (6 year holding period)293
Coutts (20 year holding period)282
Gore Browne182
Hargreaves Lansdown Portfolio Management Service175
Investec Portfolio Management Service298
Killik Discretionary214
Nutmeg 107107
Rathbones Discretionary230
Raymond James191
St James’s Place Advisory (1 year holding period)748
St James’s Place Advisory (3 year holding period)310
St James’s Place Advisory (6 year holding period)216
St James’s Place Advisory (20 year holding period)194
Towry (1 year holding period)420
Towry (3 year holding period)300
Towry (6 year holding period)270
Towry (20 year holding period)249
Source: Numis via SCM Private

Ms Miller said she doesn’t have an issue with the difference in costs and that consumers should be able to have a choice, as long s they know what the total cost will be in each case.

She said she wants to see fees presented it in a format that “people understand”, adding that full cost transparency and disclosure should take place prior to a sale as “people have inertia when they buy a product and they don’t move from it”.

Ms Miller said: “This transparency must be prior to purchase. ABI and IMA always say this must be per unit so you then have to do the calculation per unit; this should be given in a format that is understandable.”

She also flagged up that when the new pension flexibilities come into play in April 2015, it will be difficult for people to compare products “if everyone isn’t putting changes in the same format”.

“How can you make a comparison with different products in different arenas? This is the only industry where you are denied the basic right of knowing what you paid and if you don’t know that you can’t make a comparison.

“There should be detailed costs of investing and then list all the other costs that will be there. Nest would be an example as it doesn’t disclose trading costs. The cost of investing plus extra costs should be disclosed and implicit costs should on there too.”