Discretionary fund managers (DFMs) are in the midst of a model portfolio service price war but advisers have been warned not to be lured in by the cheapest offerings as the total cost of investing is more important for making an informed decision.
Over the past year, price competition among DFMs has been heating up as firms have announced cuts to annual management charges (AMCs) and introduced fee caps to keep their services competitive.
Brewin Dolphin announced recently it was removing VAT from its models, stating “we have always maintained tax should not be a competitive advantage”.
Nextwealth research has identified 44% of financial planners partner with a DFM and typically use between two and three. Similarly, research from the Langcat has found 52% of advice firms will outsource to a DFM for certain client segments.
Price is a deciding factor
Langcat consulting director Mike Barrett says his firm’s research shows that price is an important deciding factor for both advice firms who do and don’t use DFMs.
“Those who do, say price is one of the main factors for selecting which DFM to use, and among those who don’t, the most popular reason why is that they believe the cost to access third-party DFM’s doesn’t represent value for money.”
The most recent firm to throw its hat in the ring was Investec Wealth & Investment, which last month cut the annual management charge of its MPS service to 0.2% with a capped ongoing charges figure (OCF) of 0.6%. The firm said the reduced AMC, which was previously 0.3%, makes the service one of the most competitively priced on the market.
But others come out cheaper on an AMC basis alone.
According to a Tatton Asset Management presentation for clients published in July, the annual fee including VAT for 19 leading DFMs on platforms ranges from 0.15% to 0.75%, with Tatton coming in at the cheapest and Tavistock Wealth the most expensive.
Not comparing apples with apples
But even the cheapest providers could soon feel under pressure from other firms. In February, Sparrows Capital unveiled an MPS priced at 0.1% per annum with a cap of £20 ($26, €22) per underlying client per month.
This followed the launch of Invesco’s service last summer, headed by former head of fund research Ben Gutteridge, which charges £1 per client per month (plus VAT), capped at £70 per month per advice firm.
Speaking to our sister publication Portfolio Adviser in August, Sparrows Capital investment manager Mark Northway said more than 80% of advisers supported a fixed or capped fee model, based on research it conducted in conjunction with the Langcat ahead of launching its MPS.
It is not a case of comparing apples with apples, however, as Sparrows Capital’s offering, for example, invests passively and is therefore bound to be lower cost. Other providers argue that there is a layer of active monitoring and tactical asset allocation which comes at a higher cost than pure beta exposure.
When announcing its reduced costs, Investec Wealth and Investment emphasised its MPS is “actively managed with research specialists continuously reviewing the portfolios to enable tactical asset allocation and fund changes when necessary”.
“Each strategy is built from a research list that far exceeds those of their peers to ensure a range of highly diversified strategies,” it added.
‘Everyone is muscling in on the action’
Fundscape chief executive Bella Caridade-Ferreira (pictured) said MPS costs have come down as competition for adviser business intensifies, but DFMs aren’t just competing among themselves.
“Until recently, DFMs were the traditional model providers, but now everyone is muscling in on the action, including fund managers, platforms and even advice firms with their own discretionary permissions,” she said. “It all comes down to the fact that around 50% to 70% of the retail investment market is under some kind of gatekeeper influence.
“At the D2C end of the market, you’re talking about recommended buy lists, and at the other end of the scale, DFM MPS activity. If you’re not on these fund selectors’ radars, then you haven’t got a cat in hell’s chance of gaining any meaningful flows.”
Caridade-Ferreira said fees play a big role in hitting targets, especially in a low-return environment, and advisers are under pressure to ensure clients are getting a decent return on their investments.
“There are two ways to do that consistently: asset allocation and lower fees,” she added. “The rest is mumbo jumbo.”
Look at total costs, especially platform charges
Nextwealth managing director Heather Hopkins said financial advisers need to pay close attention to the total cost of the portfolio rather than just the headline MPS fee.
“I’d recommend comparing MPS fee, OCF and, if possible, I’d suggest running a few scenarios on costs including rebalances on your preferred platform,” she says. “The DFM should do this for you as part of your due diligence exercise.”
Barrett echoed the importance of viewing price in the context of the total cost of investing but stresses the importance of platform charges which he notes will vary.
“The role of the platform is quite an important factor in all of this – not only will it impact the charges, but it also defines the investment range being used,” he says.
“The vast majority of DFM model portfolios are only investing in funds, and won’t have the ability to use ETFs, investment trusts, etc, if appropriate. This is due to the poor capabilities and in some cases simple availability of these assets by the majority of platforms.”
Inconsistencies across platforms
Barrett said even with funds there can be inconsistencies across platforms due to share class availability. “Advisers will certainly need to consider the platform as well as the MPS itself when assessing suitability for the client.”
Hopkins added advisers should also look beyond costs to find out more about the set-up of the DFM, such as its size and the structure of the team, as well as the credentials of senior team members.
“I encourage advisers to ask about the number of analysts, the structure of the team and credentials of the senior members of the team,” she said.
It also pays to look at whether portfolios performed as expected through the market volatility, Hopkins added, ie did a risk profile 2 outperform a 7?
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