A Wealth Manager survey has revealed the majority of wealth managers expect to access funds as cheaply as the large platforms.
Asked what pricing level they expected to secure if funds’ annual management charges (AMCs) continue to fall, 59.5% answered less than 65 basis points for active equity products. On the active bond side, 71.8% of respondents expected less than 50 basis points.
Skandia has reported an average AMC of 0.58% on the sub-advised funds on its WealthSelect list, which moves down to 0.52% when Old Mutual’s internal products are included. Hargreaves Lansdown has secured an average AMC of 0.54% for the 27 funds on its Wealth 150+ list, while Fidelity’s Select List of approximately 140 funds will have an average AMC of 0.64%.
Looking at such figures, Turcan Connell’s chief investment officer Haig Bathgate observed that they were in line with the prices wealth managers can already command.
‘I don’t think Hargreaves Lansdown probably does get that much cheaper a deal,’ he said. ‘Ultimately they are using their scale to negotiate a better deal, but I don’t think the rates are materially more competitive than we can gain access to for good fund managers.’
Other substantial fund buyers, including Barclays Wealth’s head of multi-manager Jaime Arguello and Société Générale Private Banking Hambros chief investment officer Eric Verleyen, have agreed that the major platforms are not being offered significantly lower rates than them.
Such large firms also concur that it is reasonable for fund groups to hand them and the platforms preferential prices. Stephen Ford, head of investment management at Brewin Dolphin, supposed that it was a natural trade-off.
‘There are pitfalls in having scale,’ he noted. ‘As a scale player in this sector, I enjoy a much higher level of regulatory scrutiny than a smaller firm. But if there aren’t any benefits for scale, why aren’t the normal laws of economics applying? If I am placing more product and providing a higher degree of flow, I would expect to get lower pricing.’
Andrew Summers, head of fund research at Investec Wealth & Investment, came to the same conclusion. ‘If Hargreaves Lansdown has given a manager £100 million and I have given that manager £1 million, what am I supposed to do?’ he wondered.
Yet both equally maintain that performance is more important than price.
‘Hargreaves Lansdown, as the biggest, has generally done the end investor some sort of service by being a bit of a trailblazer on this,’ recognised Summers (pictured).
‘But at the end of the day, price is just one aspect of fund selection. Frankly, I have never chosen a fund based on five or 10 basis points. If one of my analysts comes to me and says “I can’t choose between fund A and fund B, but fund B is 10 basis points cheaper”, I will say “You haven’t done your job well enough”. You must be able to choose between fund A and fund B on a qualitative ground over and above 10 basis points. We are indeed pushing to get that extra 10 basis points, because it all adds up and we should try to do it, but the danger is we lose the bigger picture.’
Ford too saw risks in pushing prices too low. ‘If it’s a race to the bottom, we’re not going to get quality products. As a house with no product, I need quality providers. There has to be a natural floor,’ he argued. ‘I think fund pricing is now getting in the way of an effective discussion about what you’re actually paying for your service.’
That discussion, of course, will eventually become one between wealth managers and their clients as well as between wealth managers and asset managers.
‘I think within five years we will have total expense ratios on discretionary services to allow valid comparisons between other forms of service,’ Ford predicted. ‘Therefore, input costs like unit trusts become important.’
Bathgate expressed confidence, though, that such pressure would be exerted on the fund groups. ‘Clients are asking more questions about fees; they want total expense ratios,’ he commented. ‘It’s all good, but the value chain is getting squeezed and it seems to me the asset managers are going to take the brunt of that.’