Exit fees can mean advisers are hit with high and unpredictable costs, but are they justified?
Many advisers have been caught out with the unexpected burdens that come with trying to leave a platform, and an increasing number of them are looking into the potential pitfalls that exiting discretionary fund manager services could bring as well.
According to The Lang Cat consulting director Mike Barrett, investigating the potential cost of exiting is core to an adviser’s due diligence.
But finding out information on how long exiting a DFM’s services would take, and how big the price tag associated with the exit would be, is not always straightforward and requires an adviser to do some leg work. Some information on charges or times associated with quitting the service could leave advisers with more questions than answers.
In a Money Marketing market study, we surveyed 14 DFM companies. The results showed that 7IM, GAM, Parmenion and Standard Life Wealth do not charge exit fees for liquidating assets or transferring and re-registering assets with different providers. At other providers, exit charges ranged from £15 to £50 per line of stock – meaning the charge will apply per fund or share owned.
Due diligence-friendly information
Calculating transfer times can be an even more laborious process as it can depend not only on asset classes held in the portfolio, but also on a third party – transfer agents, a trust or another financial company which keeps companies’ records.
A Charles Stanley spokesman says: “Exit fees cover pro rata management fees, pro rata maintenance fees, transfer of asset fees, and overseas custody fees, and all these vary.”
Companies who charge for transferring assets usually quote fees as per line of stock.
A spokeswoman for Standard Life Wealth says: “The timing of transfers is dependent on the type of security being transferred and the process model of the external counterparty. So, timings are out of our control.”
Charles Stanley lists variables as “account type, counterparty co-operation, client co-operation, registrars and outstanding income due”. While some DFMs struggle to specify the range of possible transfer times, the FCA criticised too much vagueness when it comes to disclosing information provided on transfer times in its platform market study from earlier this year.
The regulator calls for end-to-end standards for transfer and re-registration times “through the introduction of a maximum timescale for each step in the switching process”.
The regulator also asks for clear communication to the customers provided by the receiving provider at the start of the switching process, detailing the transfer process, timelines and giving them a point of contact if they have any questions or wish to complain. Disclosing information in the most detail may be in the DFM firms’ best interest.
Barrett says: “There’s a bit of complexity to work your way through the information, but it should be fairly easy for most advisers. If you are an adviser and you are not able to find out the level of detail that you want and need for your own part of research within the due diligence process, when considering an investment, you are probably not going to make a recommendation to use it.”
Kerry Nelson, managing director, Nexus Independent Financial Advisers
Research into exit fees and times is integral to making the decision to utilise a DFM.
Not only is the initial due diligence imperative in helping source the most appropriate solution that suits your company and your clients, there is equal weighting; the importance to maintain and re-evaluate those decisions I would suggest on an annual basis.
Is it still an appropriate outsourced relationship for your clients? Importantly, are they delivering on returns, how is the comms, is it straightforward to engage a seamless professional relationship, do you retain client assets, charges, do they remain competitive, what are clients feeding back?
I think the accessibility and quality of information (on transfer fees and times) is improving, but can generally be made easier, especially for those who are considering outsourcing to a DFM for the first time.
We do not use DFMs as we have our own centralised investment proposition. However, we have taken on clients from DFMs where service is plain vanilla, returns are average and charges high. It sounds generic, but fundamentally these are all the key factors in clients using such solutions.
If any of these fall down we question the benefit.
Cashing out or transferring out
When estimating transfer times, DFMs are the most specific in case of transfers in a form of cash to requested bank accounts.
Liquidating is also faster than transferring in specie to another provider. This is good news for advisers, since putting money aside for a rainy day is an important part of financial planning and ensuring quick and smooth access to clients’ savings in case of emergencies.
Barrett says: “Liquidating is usually driven by the client, and for whatever is going on in their lives, they might need to get a hold of their money fairly quickly. The ability to react to that is a key consideration.”
Kicking off encashing processes requires formalities. Most DFMs ask for a signed request for withdrawing money from the client or their adviser, and an instruction form.
Head of intermediary relationship management at 7IM George Winters says: “[In case of encashment], we would call the client back to confirm the request for security purposes.”
In the case of Hargreaves Lansdown, the transfer time differs based on whether the transfer can be made electronically or if it has to be a paper-based process. According to the company’s spokesman, roughly one third of transfers can be done electronically.
Some of the surveyed companies offered an easy way out for their clients, not charging any fees, even in the case of transferring assets to a different provider. But how can some companies afford to offer their clients free services, where others cite administrative costs as reasons behind their fees?
A spokeswoman for Parmenion says: “Yes, the [transferring or encashment] process has a small cost, but we have chosen to absorb those costs in the interests of keeping things simple for advisers and clients.”
When planning for higher-end clients, some advisers opt for outsourcing the investment management to DFMs to provide these clients more specialised services by professionals.
Barrett says: “It’s not just about the exit fees, in some cases it is about whether it is a kind of bespoke version of the fund, where it is a segregated mandate version of the fund rather than the normal retail version of the fund.
“Is that version of the fund something that is unique to the DFM in question or is it something which you could hold through another DFM? That tends to be one of the key considerations. Because if you are looking to transfer an investment, which is unique to the particular DFM, then it is going to be much harder to move to another solution.”
One of the main grievances the regulator addressed in the platform report was barriers to switching from one platform to another. The regulator had two main concerns: lack of clarity when disclosing how long it would take to transfer portfolios, and so-called exit fees.
The DFM space could similarly benefit from better communicating on how long it may take to transfer assets in a clearer way.
When it comes to charges, some discretionary firms levy for leaving their services, often labelling these fees as administrative.
These companies should rethink whether they could adapt their business models, so they could offer this for free like some of their competitors.
Is anyone hiding information on exit fees?
Do advisers pay attention to exit conditions? The answer is yes. But first you have to look at how the arrangement is structured, because if it’s a service on a DFM’s platform with all-inclusive fees, there might be transfer charges. If it is stated that there are charges, they are normally minimal.
And it is quite a common practice that the receiving DFM may cover those costs as well. That depends on the negotiating skills of the adviser, so cost to the client is normally quite negligible.
Nobody is hiding the information on exit fees, but you do have to look.
The challenge that exists with changing bespoke DFM services to a more standard model will mean that assets will need to be sold before they can go into that new structure, so the question then is: should they be sold before they are moved as an asset, or is it moved to a new investment manager who sells it and puts it into a portfolio?
This is the sort of discussion that the adviser would need to have with discretionary managers beforehand to see what is the most cost-effective way to do it. In the case of bespoke portfolios, you might have to take into account capital tax. If it is creating liability, what happens with assets? Do they stay with the DFM or are they even allowed to stay with the DFM?
David Gurr is director of Diminimis