Discretionary management firms have long had a reputation for being opaque when it comes to costs. However, the industry is now changing.
With the increased focus on charges when it comes to advice and funds, so too a spotlight has been shining on costs in discretionary management.
A lot of this has been driven by the increased interest from financial advisers in outsourcing to discretionary managers. The trend, which was in evidence in the run up to the implementation of the RDR and has continued since, has meant that financial advisers have applied more scrutiny to DFMs and with that has come a need for these businesses to be more up front with costs.
It has also served to lower the fees that discretionary managers are charging. With a huge potential marketplace of outsourcing advisers, DFMs in recent years have been slashing fees in order to build up their market share.
Whitechurch Securities was one discretionary manager that cut its costs last year, with the cost of its passive model portfolio falling from 0.5 per cent to 0.35 per cent.
Gavin Haynes, managing director of Whitechurch Securities, says a big part of that decision was down to the “increasingly competitive market” with a “lot of DFMs marketing to advisers now”.
When it comes to costs, it can still vary from firm to firm. Data from consultancy firm Defaqto shows that of the 66 DFMs it surveyed that ran a model portfolio service, 15 of them had a charge of more than 1 per cent and 19 of them had a charge of less than 0.5 per cent.
Mr Haynes says that although price is not everything and it is more about the “value” of the service provided, those firms still charging more than 1 per cent would find it very hard to “justify to the client that you are adding value to the client after taking all those fees”.
In spite of the undoubted increase in transparency and the overall lowering of costs, many advisers still have concerns about DFM charges. Aj Somal, chartered financial planner at Aurora Financial Planning, who outsources some of his clients to DFMs, said there had been “progress” made in improving cost transparency but that it was still “hard to get accurate figures” from some firms.
In particular he raises the issue of dealing charges, which the funds industry has tried to deal with through the use of ongoing charges. However, there is no equivalent measure for discretionary management and Mr Somal thinks it needs to catch up with the funds world.
Last year two leading discretionary managers, Quilter Cheviot and Rathbones, teamed up in an attempt to establish a more transparent and complete account of the fees involved with discretionary management. They called it the ‘total account cost’ and it bundled together items such as dealing charges, custody fees and administration charges all into one measurement of cost.
