Advisers urged to check DFM charges in light of VAT case

Tom Sparke, managing director at GDIM, said advisers were potentially overpaying for the service provided by their DFM as some were likely to levy VAT on their service “just because that has been the norm”.

He said: “There is certainly potential that DFMs are charging VAT where it is not needed, and advisers are taking on that cost. HMRC has quite specific criteria for what is exempt and what is not.

“It is definitely worth both DFMs and advisers checking whether the service is exempt. Some may charge it just because it has been the norm.”

GDIM, a DFM providing a model portfolio service for advisers, does not levy VAT on its services and charges a 0.15 per cent fee.

Mr Sparke said he received confirmation from HMRC that he did not need to charge VAT when GDIM was first launched and he has had this reconfirmed since.

Scott Gallacher, director at Rowley Turton, agreed. He said: "If you are using a DFM, the Tatton MPS decision is probably a good prompt to review those arrangements to ensure that they are competitive for your clients."

The comments come after Tatton revealed in its accounts this week it had received a refund of £1.7m after HMRC agreed with the asset management firm that DFMs supplying model portfolio services were exempt from VAT.

Tatton told FTAdviser it had not charged its clients VAT, instead covering the costs itself, as it had always thought HMRC would find in its favour.

Too much

Mr Sparke said advisers were paying too much in general for DFM services, particularly if they only needed model portfolios.

He said: “If you only need MPS then you do not need to be paying 30 to 40 bps when there are firms out there charging 0.15 per cent.

“I think we will see the average cost of a DFM coming down everywhere. It is certainly going that way.”

Charlie Parker, managing director of DFM Albemarle Street Partners, agreed. He said: “DFM fees have to come down. In older firms, historical clients are paying very different rates to new clients.

“A lot of the profitability with older DFMs comes from historical advisers paying higher rates. I don’t think that is ok.”

Mr Parker said advisers should demand the best new rate available to an adviser, adding that he hoped the coronavirus crisis and the sharpened focus on costs would be the catalyst to nudge advisers to do so.

Paul Stocks, director at Dobson and Hodge, agreed, adding many DFMs had adopted a centralised MPS and therefore it was important to understand whether they were offering a truly discretionary, bespoke service to the client or not. 

He added: "I also suspect some will offer the same underlying strategies in various guises, and therefore it's important to establish the precise client need and the most cost effective way of satisfying it."

Alistair Cunningham, director at Wingate Financial Planning, said: "DFM charges are too high, particularly with adviser fees on top. There is an element of double charging as it is not possible to give coherent financial planning advice without considering the investments."

Poor service

Mr Parker said the pandemic had helped his relatively young DFM service win new clients because advisers had recognised they wanted more support for their investment side, which older, bigger DFMs were not providing.

One IFA said they had received three client communications since the proverbial hit the fan — all had been 10 per cent drop notification lettersCharlie Parker, Albemarle Street Partners

Mr Parker said a low level of service was not unusual from “clunky” DFMs with “old technology” and that the pandemic had “separated the big DFMs which have not been doing the work but charging the fee” from those that “put the hours in”.

He said: “[The coronavirus crisis] has exposed there are still a huge number of DFMs giving low levels of service to advisers.

“One IFA who joined us said they had received three client communications since the proverbial hit the fan — all had been 10 per cent drop notification letters.”

Mr Sparke said he had also seen an increase in enquiries throughout the pandemic, adding he had “really ramped up” communications since the crisis began to keep their adviser clients up to date.

imogen.tew@ft.com

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