"£7billion a year skimmed off our savings" ran the headline in last Saturday's Telegraph refering to the fees charged by retail funds.
While weekend papers run this kind of piece from time to time - it's clear from the prominence of this article, a third of the front page (not just the front page of the money section but of the whole paper) that this really is an issue of the moment.
The argument was as follows; on top of the annual management fee there are a range of administrative expenses which if customers really understood what was going on would be seen in many cases as unacceptable.
In an industry in which advisers are transforming their business models ahead of RDR to charge fees and the value chain from fund provider, product/platform provider and adviser is becoming increasingly transparent, greater price pressure will of course be placed on each.
What advice firms tell us is that something has to give. It can't be the ongoing adviser's fees as advisers in the future will be doing more not less. The platform fee where there is one, is already the smallest component.
The focus now as per Saturday's Telegraph is the costs of fund management.
We are seeing more and more clients and firms adopt a greater proportion of passives within their portfolio. Another route is the use of Exchange Traded Funds. Cost is a major driver for both of these strategies. RDR is likely to accelerate this trend given the requirement for independent advisers to take them into account.
But in a difficult and unpredictable market active managers argue that this is where they add their value; finding the opportunities which trackers cannot.
The difficulty here is that as high quality risk profiling of clients becomes the norm and applications like our own Dynamic Planner® (see this review in The Times) are used to help advisers work with customers to agree how much risk they ought to take on, having fund managers take risks outside of an agreed 'budget' does not work.
Increasingly fund managers have been asking us to classify their funds against our risk profiles given the widespread use of Dynamic Planner risk profiling across the industry.
We launched our Fund Risk Profiling service back in April and the level of interest has been amazing with DFMs, fund managers and providers coming to talk to us. The latest group to sign up last week was Skandia with their Spectrum funds.
The benefit to the customer and adviser of course is that once a risk profile has been selected it's a much simpler job to select a fund or model portfolio whose strategic asset allocation meets that profile. That straight-through process from financial and investment planning in the front office through to fund selection is critical as it lowers the cost. Not just for the adviser but also for the fund manager who can then receive instructions electronically - providing scope for fee reduction.
Technology plays a critical role in enabling advice firms to charge fees while reducing costs for the other players in the value chain. Getting costs down to a level where they are acceptable AND delivering a quality service to the customer has got to be a good thing.
Our thoughts on financial planning and front office technology
It isn't just the additional expenses that typically take the AMC from 1.2%pa(on average) to 1.65%pa (on average) - and sometimes from 1.7%pa to over 5%pa!!
ReplyDeleteBut also the trading costs of buying and selling the stocks within a fund.
For an Equity fund with 100% turnover (the average in 2009 was 90%) these costs range from 1.5%pa upto 7%pa on top of the TER - and yet few investors are aware of this.
It is one of the arguments that passive uses over active - but it is as much about transparency.
If you knew your manager had to generate 5%pa outperformance on top of the TER every year just to maintain the same performance as the index - would you think differently before buying it?
Example:
A customer walks into a car dealer and asks if the two cars in the window are the same - a red car and a blue car.
The salesperson says they are the same and each costs £6000.
"Excellent" says the customer, "I will take the blue one" and shakes the dealers hand.
"That will be £7000", says the salesman.
"What??? You said £6000!!" says the customer.
"Yes but that was before the 'other expenses.'"
At this point another salesman appears and says, "You didn't buy the blue one did you? The red one does far more miles per gallon and the road tax is lower!"
"They are the same" says the first salesman, "it is just the running costs that are different!"