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How will next leg of price war hit discretionaries?

by Eleanor Lawrie on Jun 18, 2014 at 07:00

How will next leg of price war hit discretionaries?

The retail distribution review (RDR) has sparked a price war, with the next battleground expected to be the charges levied by platforms and discretionary fund managers (DFMs).

Asset managers have already gone head-to-head on fund charges – last month Fidelity cut fees on its passive range to their lowest ever level. Platforms and DFMs are not expected to be immune from this downward pricing pressure, but are mounting the case for value for money versus cost alone.

Daniel Godfrey (pictured), chief executive of the Investment Management Association, said: ‘The next leg of competition is going to be around platforms and that will be healthy for consumers. Ultimately what we see is that clients are willing to pay for what they believe will be the best returns. So if they are confident a manager can deliver alpha, they are willing to pay for it.’

Value for money is something Andrew Denham-Davis, director of business development at Brooks Macdonald Asset Management, said his firm offers.

Denham-Davis defended the fees his company charges, which at 50 basis points (bps) is more than double some of its competitors. He said Brooks Macdonald would not be able to maintain the quality of its business if it dropped its charges.

‘I’m not sure it’s possible for us to go to 20bps. We have to make sure we look after people and can maintain the quality of our business. Selling on price is very different to being price competitive, and it’s difficult to get that compromise,’ he said.

‘Post RDR, what has really come into the spotlight is the need to be able to demonstrate what we are doing for what we are charging. I think the industry is barking up the wrong tree, and this is about longevity, and value for money.’

David Tiller, Standard Life’s head of adviser platforms, said Standard Life Wealth charges 30bps plus VAT for discretionary services, which he considers ‘pretty competitive’.

He agrees strong brands could thrive in the new era of transparency. ‘There will be some pressure, but the flipside of that is people will pay for quality. It is particularly important when you look at discretionary management. It’s not purely about cost, it’s about whether you believe they will deliver your outcome, whatever that is.

‘With the guys that have good brands and strong reputations, people are willing to pay their fees. It’s the smaller businesses that maybe do not have the track record that might struggle.’

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3 comments so far. Why not have your say?

Anonymous 1 needed this 'off the record'

Jun 18, 2014 at 09:21

All this downward pressure on everyone except the IFAs themselves many of whom INCREASED from 0.5% to 1.0% ongoing annual fee as they went "new model" but then reduced the time cost by outsourcing through using platforms and DFMs whilst still retaining a 1.0% annual charge. I haven't seen articles on IFAs having to be more competitive on price or price wars of IFAs.

Don't get me wrong, I've been serving as an IFA for 12 years now so it's nice to be on this side of the fence. I'm just looking at it honestly and objectively.

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Jun 18, 2014 at 10:08

One silent issue here is the fact that there is a wide range of DFM services. They range from merely running model portfolios (pseudo fund of funds without the protection?) with the model selection done by the IFA to bespoke multi-level mandates for clients where CGT, income, and targeted returns over specific periods are actively managed.

Shimply quoting DFM charges like 0.3%, 0.5% and 1.0% in the context of price pressure is meaningless and makes assessing value for money impossible.

For those people reading this driving a BMW, Audi or Merc why are you paying so much when you could have a Renault? The fact is the former don't compete with the latter for good reason and it applies here also.

Each DFM needs to decide where in the quality range they sit and charge accordingly. Let's not kid clients that a model portfolio run on the cheap by a DFM that has no interest in who they are or what they want is in the same league as the more bespoke offerings. Of course there will be variations and a few bad apples but generally you'll get what you pay for and that's the key.

For the IFA, they need to look at overall costs and benefits and that includes assessing where they add value in relation to their charges too.

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Jun 18, 2014 at 10:15

IFAs are leveraging their client base to their own advantage, which may not be very nice, but is understandable.

To be honest, 50 b.p. for deciding asset allocation (which is what these so-called DFM services essentially provide) is on the high side. The bigger they are, the more likely it is that they can only recommend closet tracker funds, so their clients will tend to underperform the market in real terms.

But by the time you add the IFA's 100 bps to Brooks Macdonald 50 bps, and add this to the true annual costs to a unit-holder of an OEIC of between 150 and 225 bps, there's one hell of a hurdle to jump before the underlying client can hope to outperform an index - at least 3%, perhaps as much as 3.75%.

To be honest, the only folks in this sector who are actually doing their best to provide value for money to their clients are the small independent DFM's. Whether they consider themselves to be stockbrokers or discretionary investment managers, they are all focussed on performance in a way that seems to be alien to the large groups, who seem to focus these days on risk, and mainly regulatory risk as that.

What appears to have escaped them is that if you engineer out all the risk, you engineer out most of the reward. No-one has yet come up with a consistent approach that delivers risk-free reward. In contrast, there are plenty of assets, starting with gilts, that offer reward-free risk.

I feel there is a bit of a sea-change in the offing - it may just be that the DFM landscape may be in for some further changes, at least some of which will, for once, be in the clients interest. Always assuming those smaller firms are prepared to stay the course, which isn't a given under our current regulatory burden.

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