Reassessing 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.
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.
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