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How will next leg of price war hit discretionaries?

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

Sean Walsh, chartered financial planner and director at Ergowealth, said even though it appears DFMs are getting more competitive, clients are still getting stung by hidden costs.

‘There is downward pressure as clients become aware of the fees they are paying. We still do not have the transparency we would like over total expense ratios and they [platforms] are keen to keep it vague,’ he said.

‘They are offering more value than before, but it comes down to how well IFAs can negotiate.’

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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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