As the DFM space becomes increasingly competitive with more propositions launching, the challenge for advisers is finding the outsourcing partner that offers the most value.
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”.
