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Are DFM ‘service-light’ propositions sustainable in price war?

Are DFM ‘service-light’ propositions sustainable in price war?

The past three years have seen a glut of model portfolio and unitised propositions launched on the market as investment managers have sought to attract assets from advisers, but just how low can a pricing war take fees?

Some firms are already offering what have been described as ‘service-light’ ranges on platforms from as little as 0.25% to 0.3% per year. But while growing competition might lead some firms to consider discounting on price to ensure income streams, a number of senior wealth management executives are warning against the long-term effects of building growth strategies on lower margin business.

Vestra founder David Scott is concerned a desire to be the cheapest in the market could result in firms having little incentive to invest in or develop their propositions. Vestra’s model portfolio service is available to advisers on platforms for around 35 basis points (bps), which can be reduced for larger cases, while the more service-led discretionary bespoke offering starts around 1%.

‘Even if it is efficient to run, you want to invest in your systems,’ Scott said. ‘I don’t think I have ever been interested in going into a price war in any area. It is down to each firm to determine the right price for them, given their strategy.’

While he said Vestra has so far seen ‘steady growth’ in attracting inflows through platforms and hopes it will prove a long-term growth strategy, the firm’s bespoke offering currently accounts for a larger portion of assets under management.

‘If you try to come in on price, it is always going to be flawed. It is very much about the service you are offering to the IFA,’ Scott said.

Perils of dropping service levels

Although there is scope for further downward pressure on charges, this is offset against growing regulatory costs and the cost of doing business, according to Frank Dolan, an investment director at Novatis Asset Management.

He highlights the dangers of reducing service levels in the name of building assets, particularly as a growing breed of advisers gain investment management permissions, posing yet another threat to the discretionary sector.

Showing that your service adds value can represent a challenge, but this is where economies of scale and further consolidation to enable leaner charging structures could come in.

Warning about the prospects for firms entering the market with ‘silly’ pricing in order to get funds in, Dolan said: ‘Inevitably these will not last and then costs will rise again, leaving only the service that is offered as the prime differentiator.

‘Those firms that have gone in at “loss leader” rates may fail, withdraw or, at least will have to raise fees and run the risk of losing assets as a result. Left to its own devices, the market will eventually set the level of fees that it is prepared to withstand and I would not be surprised to find it is at a lower level than now.’

Matthew Hunt, principal at Prospect Wealth Management, said discretionary firms offering lower priced platform propositions risk evolving into product providers, moving away from their traditional service-led roots. Prospect has not launched a platform proposition, as Hunt says it is unwilling to compromise on service.

Charges for its model portfolio service start at 0.75% for the first £500,000, dropping to 0.4%-0.5% over £1 million and Hunt says he has seen little resistance from clients on pricing levels.

‘We are not seeing pricing as a problem. The uncertainty is around how platforms are pricing. This is still a work in progress for IFAs and investment managers to figure out what is going to work. For the DFM to be paid 30bps, they can’t provide a good quality service at that level of fee.’

How model portfolio ranges on platforms compare:

• London & Capital: 0.25% from £50,000 to £5 million

• Quilter: 0.3%

• Brewin Dolphin: 0.3%

• Standard Life Wealth: 0.36%

• Bestinvest: 0.4%

*All charges are pre-adviser and platform fees

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