IFAs pour cold water on fee transparency

IFAs pour cold water on fee transparency

Greater fund manager fee transparency as sought by the FCA will not aid the majority of investors, according to two IFAs seeking to change investor behaviour. 

In its response to the FCA's Asset Management Market Study, the Investment Association has published its own proposals aimed at harmonising and improving how fund managers disclose fees. 

But two separate IFA firms believe overcoming behavioural biases around fees will have a greater impact for individual investors.

Lesley James, a director at Simplified Money, cites investors who equate high fees with quality and a good return on spend or those who are unaware of how much risk high fees pose.

She says the main target of the IA code is trustee boards and Investment Governance Committees rather than individual members who were unlikely to understand the detail disclosed.

"This all still fails to address education of the individual client on what fees mean and the impact they can make to investment returns," she said. "29 percent of clients don’t realise they pay anything at all and another 21 percent are unsure."

She added that clients think fees of 1 per cent are low.

"Percentages are widely misunderstood – clients think 1 percent is a small price to pay, yet the FCA study shows perhaps 50 percent of a client’s potential return is at risk [from such high fees]."

Getting fees wrong could mean the difference between retiring at 75 rather than 65, she added.

Nic Round, director at Treowe, has rebuilt his entire business model around reducing the impact of fees on clients portfolios - both IFA fees and fund management fees.

He said behavioural biases meant personal investors generally think they are paying less than they actually are and that their performance is better than it actually is. 

"There is a big gap between perception and reality," he said. "The tradition is to focus on performance rather than cost. We are all attuned to think if we are paying a lot for something it must be good."

His firm Treowe uses a business model where the client pays a one-off fee to create a portfolio and that future fees are made on a pay-as-you-go basis, not an annual basis.

Round has created this model as a preventative measure from the threat of cheap robo-advice on modelling offered by fund managers such as Vanguard. 

"We are taking the view that you do not need to pay ongoing investment advice fees through IFAs. So we have abolished that," said Round. "If Vanguard can do it why pay an IFA? We are trying to be ahead of the curve."

In such an environment he queried whether an IFA would be able to charge 1 per cent annually for the construction of model portfolios. In Round's model, he says, that both the IFA and the client work together to create the portfolio.