Charges a critical factor for advisers in choosing DFM

While investment performance is, of course, key, cost is an important factor influencing overall returns.

There are a wide range of approaches to charges, in terms of structure as well as disclosure. This can make it very difficult for advisers to compare like with like, but costs do become a competitive attribute of an investment proposition – it can be a central or secondary factor in the investment process.

True Potential has seen significant demand for model portfolios, with a total of 2,300 models on the platform set up by 300 advisers. This was the impetus behind the launch of its own multi-manager discretionary portfolios with no investment management charge.

Clients, of course, will still have to pay the underlying charges, with the ongoing figure for this ranging from 0.77 per cent to 0.92 per cent.

Chief investment officer of True Potential, Colin Beveridge, says: “We’re looking to optimise the models so they are as low cost as we can get, without compromising any of the other optimising factors – risk and volatility, long-term expected return and risk-adjusted returns.”

Smith & Williamson discloses its models’ investment management charge – 0.3 per cent plus VAT – and the underlying investment costs, on its monthly factsheets. Mickey Morrissey, head of IFA sales at Smith & Williamson, suggests: “It is very easy for advisers to see what the costs are. We hold a percentage of the portfolios in investment companies and ETFs, but we don’t use ETFs to wag the fees’ tail.”

For Mr Morrissey, returns are paramount. He says: “Within reason, we would rather get a better return even if it costs us a bit more. It irritates me how people focus entirely on cost.”

RC Brown Investment Management gives clients a choice on the fee structure for its bespoke DFM service. Investment director Alan Beaney explains that these are fixed fees in pounds and pence, a performance fee or a ‘standard’ charge, which is a clean fee.

There are many layers of fees in the industry, which makes it confusing to work out exactly what is being paid for, says Mr Beaney. “Dealing charges can add up to the same as a management charge. There could be a compliance and custody charge. Also, do clients get their full interest on cash from the investments?”

Mr Beaney suggests there will be pressure on fees for smaller clients. “Once the smaller clients realise what they are paying, around 1 per cent in aggregate for example, there will be pressure for those fees to come down – they may come down to 0.8 per cent flat.”

Nutmeg chief investment officer Shaun Port says there is a gap being created for lower value portfolios, as “discretionary manager minimums are being pushed up – the typical average minimum is around £800,000”.

Nutmeg’s discretionary service is available for a minimum of £1,000. Index funds and ETFs are used to push down the underlying investment charges, while Mr Port says “using technology helps bring down the cost of servicing clients and running portfolios”.

For him, the industry still has some way to go in terms of transparency. He says: “I think Mifid II is still going to be quite a shock for wealth managers. Displaying every single possible fee they are going to have to pay over the next 12 months is going to be a real technology challenge.”

Joanne Ellul is a freelance journalist

EXPERT VIEW

Mark Polson, founder of the Lang Cat

Mr Polson believes assessing the value of a DFM involves not what you get, but also what you pay.

“There are two links in the chain, DFMs and fund managers, that are not operating at the same standard of transparency and disclosure – with exceptions – to other parts.

“If all other parts are being transparent and disclosing properly and the DFM link isn’t, what will happen is the DFM will become irrelevant.

“I have seen advisers take back outsourced mandates as they start to understand they can create discretionary propositions themselves at a much lower cost, and take client ownership and ensure investors understand all the moving parts of that business.”