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Nic Cicutti: Martin Bamford is missing the point on charges debate

Nic Cicutti

Many years ago, I allowed myself to be lured temporarily from a career in journalism to a more uncertain but far more lucrative opportunity in the world of internet-based financial services.

It soon became clear my bosses had a penchant for putting every idea out to be tested by all manner of focus groups. The theory was the “unbiased opinions” of ordinary punters would give us a good steer when it came to making decisions about our website.

The problem, as I discovered, was it is possible to direct the outcome a focus group by the way you frame the question posed to it. To give a computer science analogy for example, data outputs are based on the quality of data inputs. This approach is known by the acronym of GIGO: garbage in, garbage out.

It is in that context, sadly, that I view a recent column by Martin Bamford in Money Marketing, discussing the fees charged by some advisers to their clients.

I say sadly because I am generally a huger admirer of Martin’s work at Informed Choice and although he may not believe it, also of his old man Nick Bamford. Both stand out as ethical champions in a sometimes depressing financial services landscape.

But Martin’s latest thoughts, in which he urges advisers to “stop being so apologetic for the many occasions where what we do adds significant value and makes positive changes to lives” completely misses the point of what the debate over charges is about.

Martin takes as his starting point the issue of so-called partially active funds, in which heavy charges are levied by many managers for essentially replicating the investment mix of far cheaper index tracker funds.

He refers in passing to “rip-off fund management charges”, an interesting turn of phrase given that I was the only person who has dared to describe them as such in my recent Money Marketing column on the subject.

Martin then offers very temperate advice to his readers, mildly suggesting that if they have any of their clients’ money in such funds they may want to consider shifting it into more appropriate and potentially better-performing alternatives, “before the regulator takes serious action”.

I am intrigued by this softly-softly approach: personally, I would have thought if any adviser was still trousering clients’ fees (or trail commission) by leaving their money in funds that do little more than ape an index tracker, they deserve to be spoken to a little more sharply than Martin somehow manages in his column.

What I am even more surprised about is Martin’s subsequent body swerve into the area of charges levied by advisers for their own services. Referring to a Personal Finance Society National Symposium in London last month, Martin tells us his father, one of the main speakers, “reminded the audience that higher charges for financial planning are justified in light of the value advisers add.”

Then, presumably referring to Informed Choice itself, Martin adds: “We certainly charge what look like expensive fees to some. In the context of what we do, though, they are excellent value for money. It is entirely our responsibility to communicate that value.”

This, unfortunately, is where GIGO comes into play. Think about it for just a second: if every adviser in the UK was permanently busy “adding significant value” and making “positive changes to lives” there would never be a need to apologise for anything, would there?

It is precisely because they are not performing those tasks, yet earning significant sums of money from their clients, that many advisers continually come under the regulator’s spotlight.

These partially active funds did not somehow magic themselves into existence without human agency. They were not all sold online, on an execution-only basis, or by dreadful life company salespeople who do not even deserve to be considered part of the financial services industry (they are, sadly).

The fact that a staggering £109bn, the equivalent of a year’s entire NHS budget, is rotting in these funds, tells us not only something about the industry’s moral bankruptcy but that advisers are intrinsically interwoven with the system that Martin decries in such a gently hushed manner. The adoption of a tone reminiscent of BBC DJ Whispering Bob Harris when discussing partially active funds gives the game away.

Martin might respond that his comments about not being remorseful are aimed at advisers like him, who do perform the role he describes for himself. The problem with this line is that if that were his target readership, then Martin should be stating far more explicitly that those he is praising for “adding significant value” is a smaller more select group of advisers than the general MM readership.

Even then, it would be an inherently vacuous argument to make: in 25 years, having spoken to literally thousands of advisers during that time, I have not met one who has ever felt pressurised into apologising to his or her clients for making them significantly richer. It just does not happen.

What worries me is, deep down, my gut tells me that Martin’s bromides are aimed at all readers of Money Marketing, telling them they are doing the right thing by their clients, even when some of them clearly are not.

As I say: GIGO.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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There are 21 comments at the moment, we would love to hear your opinion too.

  1. I think I am more on Martin’s side than Nic’s on this.

    Martin makes an important point that good advisers do add value to their clients but they must communicate this. In my experience this is not only in terms of financial wealth but also ‘peace of mind and financial security’.

    I wonder if Nic has missed the point – it is not about apologising for adding value but sometimes explaining that fees are sometimes higher than expected for reasons outside our control e.g. cost of regulation and other people’s failures.

    • I don’t think Nic Cucutti does “missing the point.” His role is to point out all the things we as IFAs or other commentators miss. However when he refers to the £109 billion “rotting” in closet trackers does he have evidence that investors are not making decent returns in cash terms in the medium to long term? The term he uses,rotting is emotive and inaccurate. It implies clients are losing money in absolute terms, which in the long term they are probably not. What he means is that they could have done better had they invested in a tracker or fund with high active share. But that is not the same thing. And if the alternative was for investors to have kept their money in cash then maybe they got a good deal. It all depends on what the comparison is. Moreover by definition so called closet trackers include some active share. The question is how much and what value is added by this compared to a pure index tracking fund? Further are nasty closet trackers not much different from smart beta strategies? If so higher fees are expected. I rarely recommend funds that are trackers or near trackers but I wonder if the evidence is there to condemn the latter outright let along define how much active share a fund must have before it is a called a closet tracker.

  2. There are thousands of investors who would have absolutely loved to be in a closet tracker over the past decade or so. Instead of the funds they were in which justified their high fees by employing a very clever person to identify undervalued stocks based on a rigorous academically-tested algorithm, and lost their investors money because the ball landed on red.

    Obviously a much better choice than a closet tracker is a loud-and-proud tracker which does the same thing for a much lower fee. But in the era of risk-targeted split-capital absolute return nonsense the closet tracker is perhaps the most underrated and unfairly maligned investment product going.

    The money is not “rotting”. It is tracking the stockmarket at a slightly lower rate of return than in a better tracker fund. Money in cash accounts or zombie With Profits funds is “rotting”. To get worked up about closet trackers when there are so many bigger scandals out there suggests a lack of perspective.

  3. Nic, as an aside question I would like to know what percentage of the £109 billion you can attribute to IFAs/RFAs? How much of this was done via direct sales organisations, banks, building societies and remains thus since the aforementioned have not existed for man years? Surely the funds selected and their ultimate suitability depend upon what basis the advice was given. For example in my own case, 95%+ of my clients are not looking to shoot the lights out with their investments. I sell the concept of trying to “comfortably beat the deposit rate they have been getting over the past 5 years over the next 5 years”. If that is not able to be done (unless another huge scandal hits) then I really should not be doing what I am doing. If the clients know want my charge is (they do) and they know what the product charge is (they do) and know what any fund charges are (they do) AND they are happy what on earth is the problem with this? As long as the objective is met over that 5 years, the outcome for the client is a good one and everyone should be happy as everyone makes a living. The problem is that the FCA, you and other financial journalists what every provider to be able to provide excellent returns for next to nothing and so eat into margins. All you want is cheap this and cheap that and nobody other than the investor to make money. Cheap is not always good. One can always prove ones point with selective date picking to measure success or otherwise. I am sure if I had the will and time to waste in doing so, I am pretty sure I could find a selective enough date range that shows “expensive funds” have far out-performed cheap ones, net of charges over the selected time scale.
    I think that for an adviser to add value he or she has to meet the client’s objective and if this is done, net of 2 or 3% pa fund charges and OAC then who is the FCA to argue over this. They have consistently stated they are not a price regulator nor should they be so why are they now starting to get their knickers in a twist over this issue?

    • Very good points. The vast majority of clients I speak to have no firm objectives for their portfolios and as a result are simply looking to achieve 1-2% growth above inflation. They just want to make sure what they leave to their kids has real value over time. A lot of the time when we discuss this point we can actually reduce the amount of risk a client is taking and achieve their goals. If that is through passive or active portfolios then so be it provided the client knows what he is paying to who.

  4. Nic has a point but I think he has picked the wrong target. Without re-reading the article, I believe that Nick’s point was that good financial advisers add value to their clients and shouldn’t apologise for charging to do so. I completely agree. A good FA’s remit is not just around which fund their client should be investing in but a meriad of other things too, all of which have the aim of benefitting the client either in ounds and pence or time.

    Maybe there are plenty of advisers leaving their clients in poor performing funds (passive or active) and taking a fee to do so but I haven’t come across any. The problem is that those “bad apples” aren’t listening to Nic or Nick.

    P.S. There are probably too many Nic(k)’s involved in this comment.

  5. Nicholas Pleasure 13th December 2016 at 2:02 pm

    I think Nic is missing the point when he refers to Martin talking about apologising for fees. This is not because the fees are bad value but because they are necessarily high. When talking to a new client I spend quite some time explaining our fees and what the client receives for them.

    Existing clients simply pay up – they know we offer great value.

  6. 1. Advisers generally do not get paid purely for recommending a fund (or funds). That is often only part of the advice offering.

    2. If I get a return net of charges of 5% pa from a relatively expensive closet tracker, am I any better or worse off if I get a 5% pa return net of charges from a cheap tracker? No, I thought not.

  7. IFC, 0.75% for ongoing servicing, £1,000,000 = £7,500 pa or £500,000 = £3,750 pa, cant find out the hourly rate charged, but if £200 per hour (inc VAT) that’s 18.75 hours pa for the £500k or 37.5 hours pa for the 1 mil . . . so value for money, transparent . . . ? surely the simplest way as an adviser is to charge for your time and have done with it?

  8. Rarely do I have to rise to Martin’s defence. I have raised him.to be his own man. But Nic has mentioned my name in his article so I feel justified to do so.

    Just about every IFA I know adds real value to their client’s lives. As previous commentators have pointed out selection of funds (indeed selection of products) is such a tiny part of what we do.

    The value we add is so varied and extensive that to focus on fund misses the point so widely that I can only conclude Nic missed the point of Martin’s piece. Advisers add value to their client’s lives to a massive level.

    It isn’t the critic who counts. The credit belongs to the man in the areana- you know the rest of the quote

  9. I am not by any means an entrepreneur or high flyer that has two business card just to accommodate the qualifications.
    Quite frankly in the view of many I run a lifestyle business If my math’s are correct on 28th February 2017 it will be my 25th year in business. Prior to that I worked in the industry at various companies since 1974 That makes 43 years in all
    In 1992 that all changed when I was made redundant. The job interviews were all similar How many clients can you bring with you and what income split you would get. I thought there must be a different way to work within this occupation of selling financial advice (which you cannot say any more). So, I decided then if I am going to change I must forget the salary, security employment offers and go work for myself. Not that that worried me since 1980 I earned my living selling policies and receiving commission. I think it was called self-employment. The only change would be I was not funding others lifestyle and I would be learning from my own mistakes
    On the 28th February 1992 received my authority from FIMBRA working from home (often refer in today’s terms by many as a lifestyle business) I had a fax machine computer and printer and phone beside which was a copy of yellow pages. The principle source of obtaining new clients
    The day on the job I spent putting floppy disk on to the computer from I had received from a Prestwood.
    Within the suite of programmers was a useful tool called The Financial Planners Financial Plan The principle behind the programme You first calculated how much it would cost to fund your life style. Bit different from be told what target commission was to maintain job security with in a company
    I think it is referred to as lifestyle style planning today. You were then asked to add costs for your car pension life assurance cost that would be budgeted if you were employed this included expenses for conferences entertaining
    The third section was cost run the business Finally it would even work out your life balance requirements Number of days Holidays, weekend off days you could not see client on what hours in the day could be billable for client work. I
    Even had a cash flow in which you could calculate what percentage of income you would receive Final it worked out your hourly rate and yield per client. While the theory was great it was hard to put into action. I have made mistakes and learnt along the way. The one point it did demonstrated to clients and what I wanted to achieve the value you I gave them.
    In those days, my income mostly received by way of commission, for selling a investment or policy which you offset your time worked on behalf of clients Some time you had surplus on the account and also a deficit. Clients were happy never once did any one complain about my method of been paid, or the policy recommended All they saw was I was working in their best interest the only person that questioned what I did with the surplus on client accounts was when I had a visit from the Personal Investment Authority I was questioned about surpluses on clients’ accounts Why I was not paying or rebating the money to the client.
    They looked my files and asked does every client get this information It was called a financial plan clearly showing the clients Net Worth, Income Expenditure Cash Flow Estate Planning pension planning and most important of all risk management strategies, as I use to call them
    They could not believe this “lifestyle business “working from home offered such a service I had just introduced the second stage managing their money and researching funds and I crude asset allocation process usual pinched from Skandia I also heard about the idea in 1994 of linking asset allocation to cash flow planning ,as result of visiting a CFP conference in Boston.
    Next I employed an administrator and eventually moved into an office I was now becoming an entrepreneur and not self-employed salesman . Must admit I have made some mistakes along the way wondering why I was difficult to work with, I found out later in life this was due to been dyslexic.
    I am now working on my next 25 years May be my client proportion This will have to change and will be built business our business model around a quote that is attributed to Alan Sugar
    “Being employed in the old-fashioned way isn’t that available any more. People have got to start thinking about doing things for themselves”
    In other words, the world of work is changing we have got to offer a service and employment career structure to the younger generation, which is completely different from what I have known for the over the last forty years
    I think we got a long way to go in this industry. Post RDR world financial advisory firms built on the principle and business structure of direct sales days of the eighties and nineties
    In the meantime, I will continue with the lifestyle business and might consider a second career of becoming an expert in how we should run our practices

    • Agreed. I was a little behind you 1998… I can’t blame my typing on anything, just not checking amd being enthusiatic mispelling and pressing post before checking, but like you, my clients don’t care how I write it, it is what i say and that i care about THEM. They come first nNOT the FCA.

  10. Personally I think they are both wrong and both right. Of course you shouldn’t apologise for your charges. Even thinking of doing so tells me that you are overcharging.

    I just can’t come to terms with Martin’s profligate approach. I always took the Arnold Weinstock approach. Not only did I count every bean – I never wasted paperclips and always reused them; scrap paper was turned into note pads and so forth. I come from a generation that firmly believed ‘Look after the pennies and the pounds look after themselves’. This helps to lower your cost base and pass some of these savings on to your customers.

    The only charges I was obsessed about were my own. I always asked the question “Would I be happy with this bill?” I saw and have seen since selling my business what I consider to be the hugely rip off charges that some advisers levy. I of course can’t comment on Informed Choice charges, but in other firms I have seen charges made for what I consider to be not very much. For example charging for funds under management when that management is outsourced to a DFM – outrageous.

    On the other hand fund management charges don’t wind be up PROVIDED the manager makes me a profit or at least protects the capital when things turn bad. I won’t blink at a 2% charge if he makes me 15%. Or if the market tanks by 20% and I only lose 5%. (You don’t get that with a tracker).
    As others have said it is value. If you have to explain your value to the client you have already lost the argument.

  11. Harry Katz said “Or if the market tanks by 20% and I only lose 5%. (You don’t get that with a tracker)”.

    Or you might lose 40%.

    • I think you misunderstood. The example pre-supposes that you have chosen the right fund manager. I accept that only a small proportion of fund managers beat the index – and that is precisely the job of advisers – to identify and select those that do. Again I admit easier said than done, buit if it was easy everyone would do it!

  12. Our industry is unusual in that what looks like good advice can produce awful results and what looks like awful advice can produce fantastic results. Thing being unless we are best pals with Dr Who, we don’t have a TARDIS to see how future events can blow our best made and best laid plans wildly off course.

  13. Harry Katz says “I accept that only a small proportion of fund managers beat the index – and that is precisely the job of advisers – to identify and select those that do”. Again I admit easier said than done, buit if it was easy everyone would do it!

    I’m no mathematician but if you’ve got a 10% to 20% chance of picking the right active fund and you pick an active fund in each asset class (say 10 asset classes) then your chances of beating the overall market reduce to practically zero. If that’s our job we may as well all go home and let the Robot’s take over.

  14. I can assure you I am no genius, but my results speak for themselves. I generally (but by no means always) manged to bet the indeces and now that I managehalf of my own invetments still manage to do so.(Ten sctors and 35 + Funds) I’m just about to do a 6th monthly vcaluation, but back in June my portfolio outperformed the WMA Balanced and the All World (the two most relevant for my investments). This was by no means a one off.

    Your maths might be accurate, but I’m afraid they don’t always apply.

  15. PS. Anyway the main point of this forum is about charges, so we have rather got a bit off the point. As I said – if you have to justify or explain these to yourt client, you have already lost the argument. Your value should be self-evident. If it isn’t then either you are charging too much, or you need to find different clients.

  16. The issue here is not whether advisers are worth their money. The issue is whether, knowing now that the FCA has identified £109bn invested in pseudo trackers – ie: funds which are performing like trackers but charging like actives – what we do about it.
    Andy, I quote you: “If I get a return net of charges of 5% pa from a relatively expensive closet tracker, am I any better or worse off if I get a 5% pa return net of charges from a cheap tracker?”
    The problem (most of) this thread appears to be overlooking is that with different fund charges, and identical underlying performance, what Andy suggests is impossible.
    If you have a passive fund at 0.25% and a pseudo passive at 1%, the pseudo is losing you 0.75% pa in performance to charges that you did not have to lose. And the gap gets even wider, each and every following year, because you keep losing that 0.75% to charges which the fund can never, precisely because of its pseudo tracker nature, get back. Which, over 20yrs+ could make the difference between making target funding at age 65 or having to wait until age 70.
    I’m completely with Nic – Yes that £109bn is definitely ‘rotting’. And where we come across it, it’s our job to get that money out.

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