Investments  

Adviser Rant: ‘Off the shelf’ portfolio fees must be fixed

Abraham Okusanya

The use of model portfolios has become commonplace within advice firms, with many choosing to outsource or use ‘off the shelf’ model portfolios.

These are typically provided by discretionary managers or research firms like Morningstar and this is completely understandable, given the time and expertise required to construct a portfolio.

My bugbear is how managers charge for these ‘off the shelf’ models. Model portfolios are offering their intellectual property. But why is that typically charged on a percentage basis?

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A key issue here is the total cost of ownership (TCO) to the client. Using an outsourced model portfolio may add 0.25-0.5 basis points in charges. Add to that the platform charge, the underlying funds’ fees and adviser charging, and the TCO may be well in excess of 3 per cent a year. Compare that to equity risk premium, which has been roughly 4 per cent.

The other way to look at this is that if, for instance, your firm has £100m funds under advice and you hand 30bps of that to a model portfolio provider, that is £300,000 a year of your clients’ money.

If you choose to outsource or use ‘off the shelf’ models, why not make use of economies of scale and agree a fixed fee with the provider? The adviser can then pass the cost on to their clients. The more clients you have in the model, the less the unit cost per client.

Abraham Okusanya is principal at FinalytiQ