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Discretionary fees laid bare: let the calculations begin...

Discretionary fees laid bare: let the calculations begin...

The stark divergence between wealth managers' charges will be laid bare under MiFiD II proposals.

Calculations by Numis reveal that St James’s Place charges over four times the amount that Nutmeg does for a standard client portfolio, and more than double what Rathbones levies.

The European Securities and Markets Authority’s upcoming MiFID II proposals will force wealth management firms to fully unbundle their fees and charges. If the rules go through in their current form, investment managers will have to disclose all charges as an aggregated cash amount or percentage from January 2017.

This figure will include initial and ongoing costs, transaction, custody and research costs, along with performance fees and exit charges.

Like the retail distribution review, unbundling could put an end to companies cross-subsidising less profitable parts of their business. At the same time, stripping out administration costs is likely to draw attention to them as an area ripe for savings. Meanwhile, companies that run unitised propositions may have to launch new share classes to show the pure investment management fee.

Whether the whole exercise will provide greater clarity for the end-client remains to be seen. Andrew Wilson, head of investment at Towry, welcomes the transparency but expects the volume of information may prove too much for many clients to digest.

He anticipates the unbundled investment management fee (pre-adviser and platform costs) will range from 35 basis points to 100bps across the industry. It will likely average in the 50 to 75bps range, depending on the size of the client, institution and how sophisticated the end-product is.

He also warns that firms running UK equities direct may boast of a lower management charge but may be picking up commissions from deals on underlying shares.

When all other layers of charges are factored in, he said: ‘Hopefully clients can then assess where the main part of their fee is going and what is and isn’t good value for money.’

Numis Securities has developed a calculation framework, which could provide a building block for firms looking at how to unbundle their charges (see table below). The framework includes VAT and the fees paid to underlying funds.

The table nevertheless illustrates the divergence of charges that a client would pay with a £500,000 portfolio split evenly between funds plus shares, investment trusts and ETFs, with an average of 24 transactions per year.

Pamela Reid, executive director at Quilter Cheviot, who helped to develop a total account cost methodology for private client firms alongside Rathbones, said the methodology would be adapted accordingly. ‘Everyone is being engaged on this one. We have been there leading a response to this for many years,’ she added.

*The table published in this week's Wealth Manager magazine did not correspond to a £500,000 portfolio, but rather a £600,000 portfolio with £500,000 in funds and £100,000 in shares/ITs/ETFs based on 5 fund trades and 5 share trades per year. The table below correctly shows a portfolio with £500,000 invested 50% in funds and 50% in shares/ITs/ETFs with 24 transactions per year. Citywire apologises for any confusion caused.

How wealth manager charges add up

Advisory/Discretionary Managers £ to company bps to company £ to fund manager on funds bps to fund manager on funds £ to fund manager on ITs/ETFs bps to fund manager on ITs/ETFs Total £ Total bps
Barclays Wealth Discretionary 7,500 150 1,875 75 875 35 10,250 205
Brewin Dolphin Discretionary (fee only model) 8,280 166 1,875 75 625 25 10,780 216
Coutts (6 year holding period) 6,833 137 2,750 110 2,750 110 12,333 247
Coutts (20 year holding period) 6,250 125 2,750 110 2,750 110 11,750 235
Gore Browne 5,850 117 1,875 75 625 25 8,350 167
Hargreaves Lansdown Portfolio Mgmt Service 6,018 120 1,625 65 625 25 8,268 165
Investec Portfolio Management Service 8,340 167 1,875 75 625 25 10,840 217
Nutmeg 1,950 30 575 23 575 23 3,100 62
Rathbones Discretionary 3,580 72 1,875 75 625 25 6,080 122
Raymond James 5,250 105 1,875 75 1,875 75 9,000 180
SCM 3,400 68 750 30 750 30 4,900 98
St. James's Place Advisory (6 year holding period) 13,417 268 0 0 0 0 13,417 268
St. James's Place Advisory (20 year holding period) 10,500 210 0 0 0 0 10,500 210
Towry (6 year holding period) 8,450 169 1,000 40 1,000 40 10,450 209
Towry (20 year holding period) 7,750 155 1,000 40 1,000 40 9,750 195

Source: Numis’ pricing model with Citywire input

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