Cost vs. value for money – update

23 June 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)

Active

OCF

1.15%

 1.3%

Passive OCF

OCF

0.38%

 0.4%

Risk targeted Active

OCF

1.25%

 1.3%

Bespoke DFM

Service Fee

1% (inc VAT)

 1% inc. VAT

Managed Portfolio

Service Fee

0.58% (inc VAT)

 0.75% inc. VAT

Bespoke DFM

Transaction Fee %

0.84%

1% per transaction

Managed Portfolio

Transaction Fee %

0.60%

1% per transaction

Comparing between the two years, there does appear to be a reduction of charges in some areas. 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.

Meanwhile, 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. 

Other concerns – Kicking the MiFID can

Highlighted in last year’s report was the issue of transparency for investors, with particular regard to DFM fees vs. unitised fund offerings. This mostly effects how DFMs quote their fees to advisers and the potential for individual deals to be made between a DFM and an adviser.

However, within unitised funds there are still improvements to be made and MIFID II addresses some of these concerns. Greater transparency is promised such that funds’ fees reflect all of the costs a client may experience and to provide a detailed breakdown to the investor. This breakdown includes expenses such as research, transaction costs and other supporting operational services. We have seen movement in this direction with a couple of fund houses removing research costs from their fund fees already.

Unfortunately, MIFID II regulations are delayed again for another year (now pencilled in for enforcement in 2018) and we anticipate fund providers making only minor changes ahead of this deadline.

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