However, it is proving to be a real headache for many, due to a lack of comparable data on pricing, risk and performance, which is preventing advisers from carrying out top-down due diligence for different DFMs or multi-manager solutions, according to a joint report by CWC Research and The Lang Cat.
The study, entitled Never Mind the Quality, Feel the Width, stated: “We tried – really we did – to identify any way an adviser could start by looking at the whole outsourced CIP [centralised investment proposition] market and then focus down to a rational selection. We didn’t manage.”
The report also found that the combination of an increased focus on risk and due diligence, along with RDR margin pressures, appeared to be driving the trend of greater use of outsourcing for asset allocation and fund manager selection.
Nearly half of respondents of the 45 industry professionals – including 38 IFAs – interviewed by CWC Research said it was “quite hard” or “very hard” to identify these charges.
The study warned that making cost-based comparisons between managers in the multi-manager, multi-asset and discretionary fund spaces was nigh on impossible.
Speaking at the launch of the report, Mark Polson, principal at the Lang Cat, pointed the finger at DFMs in particular for their “lamentable” lack of effort in making data more readily available.
This view has been echoed by Peter Chadborn, director and IFA at Colchester-based Plan Money, which largely outsources CIP to platforms instead of using DFMs because of this concern.
He said: “We are living in a world in which we, the advisers, have to prove that we understand what we are recommending in terms of the exact cost.
“It is difficult for DFM solutions in which the charges can be a bit opaque.”
Susan Hill, chartered financial planner at St Albans-based Susan Hill Financial Planning, who mainly uses platforms, multi-asset and her own investment solutions, has called for a standardised charging model to be implemented to enable advisers to compare cost more efficiently.
She added: “Time and time again a provider would say that all their charges are displayed on their website, but you often find that the true costs are staggered across the document instead of being in one place. These charges should all be displayed on page two.”
Disclosure of costs is one issue in particular for which DFMs and multi-manager solutions have come under considerable flak in the past.
The annual management charge is one commonly used by DFMs, which is a levy to pay for the cost of the manager’s investment management services such as research, analysis and portfolio management.
However, the charging structure was panned by the city watchdog in the findings of a thematic review on clarity of fund charges which was published last May.
AMC could prove to be a sticking point for retail investors when it comes to comparing chargesAMC could prove to be a sticking point for retail investors when it comes to comparing charges because it does not provide investors with a clear, combined figure for charges, as it excludes additional levies and expenses that are taken from the fund, according to the FCA.
Other models do not fare any better. The total expense ratio consists primarily of management fees and additional expenses such as trading fees and legal fees, but do not always include all expenses – some performance-related fees, for example, may be left out.
In 2013, leading discretionary managers, Quilter Cheviot and Rathbones, collaborated in a bid to create a transparent comparative pricing model to calculate the total cost of using a discretionary manager, expressed as an annual percentage.
However, even this was met with criticism because it omitted some charges, and the data was not readily available for advisers.
Miles Robinson, head of UK financial intermediaries at Tilney for Intermediaries, said that the providers have endeavoured to support advisers by putting together a document that answers questions most commonly asked by advisers during the process.
Describing the report findings on charging transparency as “a shame”, Mr Robinson – who is also a chartered financial analyst – gave his backing to the idea of a standardised charging model, adding: “I do feel I would be fully supportive of a global standard of how providers can disclose their fees.”
The majority of respondents of the study believed that outsourcing investment management increases regulatory risk, partly through extra parties being involved and a loss of control.
When it comes to adviser charges, one-third of advisers in the sample said they operated on a maximum 3 per cent initial basis, compared with more than 50 per cent in 2010.
Ten per cent of the sample charged a maximum of up to 1 per cent initial, compared with just over 30 per cent in 2012 and just under 20 per cent in 2010, according to the report.
It added that maximum ongoing fees above 1 per cent were rare, with around half of respondents charging 1 per cent.
One-third of the study’s sample said that an adviser can justify fees when recommending a multi-manager, with just under two-thirds disagreeing.
Securing a complete dataset can be challenging, according to the dossier. Providers are required to disclose top 10 holdings only on factsheets, but some multi-asset funds have more than 40 underlying holdings and model portfolios vary widely, it added.
However, getting to the bottom of the total cost of investing was seen as more straightforward for multi-managers than for DFMs, according to the report. The lack of transparency around DFM pricing, as well as trust in what is disclosed, were major issues.
Providers could “reasonably clean up” how they disclose costs, according to the report, which added: “Instead of doing the minimum – which is the approach too many take – it would be good to see an adviser-first approach.”
In addition, a lack of uniformity in fund-charging data, in tandem with an absence in consistency across the investment report, means that there is no way for an intermediary to achieve an effective whole of market, time-efficient, quantitative analysis on model portfolios.
Emma Bird, a spokesman for the Wealth Management Association, said that MiFid II and PRIIPs will make information available in a common format. She added: “The actual fees and charges paid to the discretionary manager are transparent; it is the disclosure of the costs associated with the product that is the issue, and that is currently the subject of considerable discussion among European regulators and other bodies such as the FCA’s consumer panel.”
The city watchdog has made it clear that it is the onus of the adviser to identify how much the total costs are, whether or not a discretionary manager discloses charges in full.
If advisers are to avoid disciplinary action by the regulator, the due diligence and selection processes need to be, in the words of the report, “highly robust, exhaustive and objective”.
The study continued: “We have seen some excellent examples of good practice during this research, but we have also seen practice which demonstrates quite how much scope there is for development.”
Myron Jobson is a features writer at Financial Adviser
Key Points
A lack of comparable data on pricing, risk and performance is preventing advisers from carrying out top-down due diligence.
Many believe that outsourcing investment management increases regulatory risk.
The city watchdog has made it clear that it is up to the adviser to itemise the total costs.
