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Malcolm Kerr: The value of reviewing client charges

Malcolm_Kerr_EYReassessing fees on portfolios can identify savings or show clients they are getting good value

I received my annual ex-post costs and charges disclosure statement from the discretionary fund manager that oversees my Sipp investments last week. It is the first such statement to arrive. As someone still close to the retail investment market, I know I should not have been surprised with the content; but I was. The total effect of costs and charges on returns during the past 12 months added up to a number that astonished me.

To provide some context, my pension arrangements benefit from lifetime allowance protection and my Sipp investment portfolio includes securities and collectives; about 40/60 when I last looked.

My risk profile is medium, I am in drawdown and a higher-rate taxpayer. And I keep a couple of years’ income on deposit to mitigate sequencing risk.

So how did the numbers break down? To avoid any envy or pity, and to make the maths simple, I have recalibrated them on the basis of a portfolio value of £1m.

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My DFM fee is 40 basis points so that would be £4,000. Transaction costs at a flat £30 per deal worked out at £510. VAT and some other small charges added £1,500. So, a total of about £6,000.

Then we get to the collectives: “external charges” that included ongoing charges of £7,700 and “transaction charges” of about £1,500 on my notional £1m portfolio. This all totalled £15,200 – call it 1.5 per cent – on the disclosure statement. Of course, there is also the fee to be paid to my IFA from the Sipp. That is a further 40bps. My Sipp has a flat fee of about £1,000 and I use a free platform for the rest of my investments. All these charges add up to just over £20,000.

At least I can see where the money went, so I guess the Mifid II disclosure requirement has worked in my particular situation. But here is the thing: if I choose to take 4 per cent income, as seems to be quite typical, my £40,000 will be only £24,000 after tax – just £4,000 more than my charges.

I guess I am not the only drawdown client in a similar situation. In fact, one of my pals, investing serious money through a very well-known wealth manager, has total charges of 3.1 per cent. He couldn’t believe the numbers when he saw them. When I told him that they looked accurate, his response could be described as “WTF?”.

As an investor in drawdown, what can I do to reduce my costs? First, I could try to get the DFM and adviser fees down. I’m not sure any reduction would be that significant but I will give it a shot.

Second, I might consider suggesting to the DFM that we reduce the amount invested in expensive collectives and increase the exposure to direct securities.

The problem is that my particular DFM is far stronger in the UK market than overseas ones, so collectives seem a better bet in that space.

I’m now thinking of a much more radical solution, even though I know it carries a fair degree of risk.

I’m no expert, but what about creating a well-diversified passive portfolio with regular rebalancing?

I imagine the cost would be around 25bps. On my notional £1m, that is £2,500. And maybe I could come to an arrangement with my IFA to pay an hourly rate for financial planning and other advice? Say, £200 per hour and maybe 10 hours a year. That is another £2,000.

So, all in all, a fee of £4,500 rather than £20,000 and an additional gross income of £15,500 – a net increase of about £9,000 a year.

That would increase my drawdown income by more than a third and pay for a couple of decent holidays.

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Now, of course, this is a pretty simplistic hypothesis. But I am writing as a client, not as an IFA and/or investment manager. I make no apology if I have not reflected some of the complex issues surrounding planning for retirement income via drawdown.

Is this scenario a threat or an opportunity, or not even interesting to financial advisers? My view is that it is all three.

The threat is, of course, if the client does not believe he or she is getting value. And as we know, value means different things to different people.

For example, the value I get from my IFA covers a whole range of topics. Just a couple of weeks ago, it covered how best to reduce capital gains tax on the sale of a real asset, rather than a regulated product.

I guess the threat can be mitigated by communication at the appropriate time, reminding clients of the services that have been provided. As someone said to me years ago: “It’s not just about the money.”

Perhaps the opportunity is to seriously consider how you might be able to reduce the charges drag on portfolio performance for your clients. Or maybe showing them cheaper propositions and explaining why cheaper is not always (or even never) a smart alternative. And, in addition, providing a client experience that is second to none. Having said that, my pal with the 3.1 per cent charges and 2.4 per cent net income will take some convincing.

If you think the charges issue is not interesting to you and your clients, you might want to ponder the numbers above. I appreciate I have used a notional £1m portfolio.

But I think the same logic applies to a £100,000 drawdown pot – and the percentage charges on an investment of that size would probably be even greater.

Malcolm Kerr is an independent consultant



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There are 4 comments at the moment, we would love to hear your opinion too.

  1. Hi Malcolm
    Two comments: –
    Firstly, with regard to adopting a passive portfolio versus your current DFM portfolio, then you need to make sure you end up with a passive portfolio that matches the same risk profile and which you can compare in terms of performance against your DFM – otherwise you will not just get a much cheaper portfolio, but one that might perform very differently and might just be worse, so you end up thinking you have saved money but get less performance for it!
    Secondly, the figures for a £100k portfolio might not necessarily be much worse. It would depend on whether that client was in the same proposition or not. This firm generally invests smaller Drawdown clients into Royal London’s proposition where we get a multi-asset fund solution that rebalances automatically for 0.45% per annum (at that level).

  2. If you are paying a flat fee of £1,000 for the SIPP, you are over paying. There are plenty of fixed fee full SIPPs that could accommodate your investment accounts for £350-£500 pa and with annual drawdown fees of approx. £150 or less. Whilst the impact on your overall costs are small, your adviser should have identified a more cost effective SIPP. You should also be putting pressure on your adviser to accept a fixed annual fee as opposed to a % of fund fee. His costs for providing you advice and their administration will be broadly the same irrespective of your fund size, so there is no justification for charging 0.4% on a fund of £1 million+ and you should insist on a fee cap to accurately reflect the IFA’s genuine time and costs.

  3. Rory Percival 30th May 2019 at 9:57 am

    Interesting article. As Malcolm indicates, there are likely to be many clients who go through the same thought process and head for passives or other low cost alternatives. Cost differences are now easy to see and for the client to understand. Differences in risk and prospective returns is beyond many clients so they will just see the benefits of lower cost. It all comes down to having a good proposition and being able to communicate it well. Most firms I have seen would benefit from spending some time on their proposition – segmenting client bank and mapping investment solutions and advisory services #PROD

  4. Price, as Malcolm describes, is important. Value though is much, much more important. The SIPP wrapper is a commodity if you can get it cheaper do so.

    The choice between a DFM service and a passive portfolio is a personal thing it depends on whether you think one or other is more suitable for you.Other commentators on here have already pointed out some of the issues to consider.

    But I have a couple of questions; What do you actually get from your adviser? Is it investment management (isn’t that what the DFM is doing?) or is it more valuable stuff like financial planning, challenging your thinking, acting as a sounding board, technical advice and support,

    Does your adviser “get you”? Are they a net contributor to your life or just a cost?

    You are right though, pricing needs to be reviewed regularly but so does proposition

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