A common misconception is that discretionary investment management is prohibitively expensive. We often hear this cited by advisers as a reason for not using third party discretionary services for their clients.

The recent findings of the Financial Conduct Authority (FCA)’s asset management market study indicates that high charges are not the only concern. There is a general lack of awareness of costs by investors, which has led to the FCA’s call for an ‘all in’ asset management fee. This would include fund costs and an estimate of transaction charges.

We find this interesting, although not unexpected. However, the discretionary managers featured on our website offer bundled or unbundled charging and are advocates of fee transparency (a topic we’ve covered numerous times on this site). Many of them also offer their services at very competitive rates, which makes their DFM solutions a cost-effective option for clients.

 

One such manager is RC Brown Investment Management

RC Brown are passionate about fair and transparent fees for discretionary investment management. Indeed, they led the way when they launched their charging structure in 2010, prior to the implementation of the Retail Distribution Review (RDR).

At that time, the market wasn’t quite ready for the RC Brown approach. Today, the competition is catching-up. Although in the eyes of Robert Clark, Sales and Marketing Director at RC Brown:

 

“There is still a long way to go. Fees for discretionary investment management are nowhere near transparent enough.”  

RC Brown offer two charging options:

1. Performance Fee Option. The performance fee option is charged at 0.625% for portfolios up to £375,000 and 0.40% for those over £375,000. A performance fee is applied, charged at 20% of the portfolio’s annual return, when the return is above 4%.

2. Conventional Fee Option. The conventional fee option is levied at 1.25% for portfolios up to £375,000 and 0.80% for those more than £375,000 in value.

The charges quoted are all-in, which means dealing, transaction, admin, trust and custody fees are included. A client will not see additional line items on their account for discreet charges, which would push the overall cost above these agreed headline fees.

 

Questions to ask your discretionary manager

In Robert’s view, based on examples he has seen from across the market – even post RDR – the old-world game of not fully disclosing fees is still going on. Some DFMs quote their fee, however they neglect to include third party charges until they are challenged.

Robert strongly encourages advisers to dig deeper when looking at DFM fees.

 

“Advisers should demand to understand what the total overall cost will be to the client. It is time for financial advisers to take charge.”

 

To get a handle on the fees a discretionary manager will charge, Robert recommends asking the following questions (word-for-word):

  1. What is your annual discretionary management fee?
  2. What are the underlying fund fees for the portfolio?
  3. What about portfolio turnover?
  4. What are your brokerage charges?
  5. Do you retain cash deposit interest or pay this back?
  6. What tax is levied, including VAT (where relevant)?
  7. Do you use hedge funds and structured products? If so, what fees are typically levied?

 

Tallying up these fees will give you a clear view on the overall charge to the client.

 

According to Robert:

 

“While things are changing in our profession, I find it difficult to defend the DFM industry (espousing the value of using third-party discretionary services), when many simply feed out numbers, rather than offering full fee transparency.”

 

Other best practice examples:

»  Annual statement. An adviser I work closely with sends an annual statement to all of her DFM clients, quoting the overall fee in ‘pounds, shillings and pence’. This includes a breakdown of the discretionary management fee (with or without VAT, depending on the use of underlying OEICs), all third-party investment costs, platform charges and the adviser’s own fees. All costs are itemised, line-by-line, to show the client what the various charges relate to.

»  Fee review. Another adviser I spoke with conducts a formal fee review of charges, risk numbers and performance every quarter. At DISCUS, we recommend undertaking a review at least annually, as part of your ongoing due diligence process.

»  Percentage and monetary fees. Most DFM charges, quoted in sales materials, use percentage-based fees. Given the FCA’s requirement to illustrate costs in monetary terms, showing the monetary equivalent for the discretionary service – sent directly after the initial discovery meeting – can help clients to grasp hold of the overall cost for the service.

 

Cost versus value

My father often says “Some people in this world know the cost of everything and the value of nothing”. Attention grabbing headlines on the ‘high cost of DFM’ and various trolls we’ve experienced on social media indicate that this is the case in our profession.

Recent growth in the use of third party discretionary services is a testament to the value it can deliver. Advisers we know using DFM often say “It’s the only way to professionally manage money”.

While there is downward pressure in fees, cost-effectively delivering an in-house investment solution may prove difficult for a lot of advisory businesses. In our view, this will drive firms to evaluate using third party discretionary services – where cost will no doubt be placed under the microscope.

Fees, particularly those for discretionary services, tend to generate a lot of interest and heated debate. Please post your comments or questions below.

 


This article was created for the DISCUS website based on an informal discussion with Robert Clark of RC Brown Investment Management. If you would like to find out more about RC Brown, please visit the RC Brown page on this site.