Cost vs. value for money – update

23 May 2016

Jason Baran – Insight Analyst (Investments)

In March of last year, Defaqto published a case study and survey into how advisers consider cost and value in making recommendations to their clients. Among the areas covered included how costs are measured, which investment solutions are used; whether they be multi-asset risk targeted funds, DFM bespoke and model portfolio solutions, or a portfolio of passive funds.

Costs:

To revisit this subject, we take an updated look at costs in our Defaqto database.

Service Type

Fee Type

2016 Data (mean)

2015 Data (mean)

Bespoke

Service Fee

1% (inc VAT)

 1% inc. VAT

Managed

Service Fee

0.58% (inc VAT)

 0.75% inc. VAT

Bespoke

Transaction Fee %

0.84%

1% per transaction

Managed

Transaction Fee %

0.60%

1% per transaction

Active

OCF

1.15%

 1.3%

Passive OCF

OCF

0.38%

 0.4%

Risk targeted Active

OCF

1.25%

 1.3%

Comparing between the two, there does appear to be a reduction of charges in some areas. Within Bespoke and Managed DFM portfolios, the average transaction fee has reduced. Also, service fees for Managed DFM portfolios has also fallen slightly. We attribute this to the continued trend of competition between DFMs against traditional unitised funds, and post-RDR the need for DFMs to demonstrate their value has magnified.

Meanwhile, active fund OCFs have fallen by 15bps to 1.15% on average. Passive funds remain at around 48bps OCF and we believe this lower level of passive fund OCFs continues to place active fund fees under pressure.

Other concerns – kicking the MiFID can 

Highlighted in last year’s report was the issue of transparency for investors. While the above fee reductions are in their interests, it was noted several times that comparisons for investors can be hard as DFMs do not readily reveal their fees. On the one hand, this is due to the nature of a customised bespoke portfolio, on the other, particularly for Managed Portfolios, a DFM will negotiate individual deals with each adviser that refers client funds to them. Hence an adviser who has more business with a DFM will be able to negotiate a better deal for their clients. This might sound reasonable on the face of it, but how is a client to know which adviser has what deal with a DFM without going in for a one-on-one session? Overall, client interests are not being best served due to a lack of transparency in the distribution chain.

MiFID II regulations promised to end this practice by enforcing DFMs to charge the same fee level for each adviser, regardless of how much business they send their way. This was to ensure transparency and a fair deal for clients regardless of how they accessed the DFMs management. Unfortunately, MiFID II regulations are delayed again for another year (now pencilled in for enforcement in 2018) and we don’t anticipate the market changing its behaviour rapidly ahead of time.

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