If there was any doubt, Brewin Dolphin has proved that size does matter – at least when it comes to achieving cost savings for clients.
After accumulating over £2.3 billion in its managed portfolio service, the wealth firm made an interesting move last week. It announced that it will restructure its MPS to invest in third party fund managers via segregated mandates. The move is expected to result in annual cost savings of around £3 million a year for advisers’ clients, but will others follow suit?
Group head of research Guy Foster has highlighted a number of advantages to the new structure, from ring-fencing liquidity to lower ongoing charges and transaction costs, and says it could be done with less assets, ‘but not much less’.
‘We’re about £2.5 billion now, and I think we had it in mind to achieve this when we got to £2 billion. Recent flows we had were very strong and the process is more complex than we imagined and that delayed it a little,’ he said.
‘We chose those numbers because we wanted to have a good spread of investment managers and robustness if we see a downturn. You want to know each managers has enough money to continue running it on a cost effective basis.’
Investment consultant Graham Bentley says that a reasonable size would be needed to have fund managers agree to manage separate mandates. ‘The industry typically doesn’t have the amount of assets under control that Brewin does.’
He suggests that within the wider industry, it is more likely that unitisation of portfolios becomes a more common approach. When companies get to a point where they have sufficient assets, they can then make the cost of the fund even cheaper by awarding it to managers.
Seven Investment Management head of intermediary sales Robert Hardy agrees that Brewin Dolphin has the benefit of scale behind its MPS operation.
He stated: ‘The retail advice market, post-RDR, has seen an ever increasing focus on cost across all aspects of the advice chain. We have seen downward pressure on platform fees, alongside a shift in advisers moving towards more passive-based investment structures as advisers look to drive down the proposition costs that they offer to their clients.
‘At 7IM we have the privilege of looking after £4 billion of client money within our unitised AAP (Actively Allocated Passive) Oeic range. In a similar vein to Brewin Dolphin, this has given us the opportunity to negotiate significant discounts from a range of passive investment managers, both within our AAP range and those that we have selected to fulfil various asset class holdings within our own £800 million model portfolio range.’
He added: ‘Cost is, and will no doubt continue to be, a key differentiator in an environment where clients, quite rightly, have a clear picture of the respective costs that they pay for financial advice, investments and the platform that they utilise.’
But are cost savings enough to attract more advisers to the proposition?
According to Bentley, advisers will appreciate the changes as it will make their overall proposition to clients a lot cheaper. However, for those advisers who do not outsource their investment management to discretionary managers, he doubts it will provide any additional incentive to do so.
‘Those individuals who have yet to outsource won’t find this any more interesting. Those that are already outsourcing, and in particular feel under pressure to reduce fees, may very well look at Brewin’s arrangement and say I have a potential reduction in the price, this is basically a better offer. One of the other things is the portfolio turnover would be lower.’
Christopher Aldous, head of asset management at Charles Stanley, says while overall he views it as a good move for Brewin, he feels some IFAs might not like that the ‘visual richness’ of the underlying portfolio is reduced.
‘Brewin has a credible manager of managers model range and powerful sales operation to distribute it. Their strong growth was not hampered by having overall costs which were towards the higher end of the scale at around 1%, including their AMC and VAT,’ he said.
‘[And] 0.9% to 1% is fairly typical for this type of solution, if you include the manager of manager’s fees, so Brewin will certainly gain a cost advantage by their planned move to gain access to selected managers via segregated mandates. They state that they are saving 0.15% or more by doing this.’
However, Aldous says this will come at a price, in that investors in the MPS are unlikely to find as much detail on the underlying segregated mandates holdings as they would with retail funds.
‘Whilst their approach brings cost benefits it could also reduce the visual richness and granularity of the underlying portfolio which may not please all IFAs.
‘On balance, this is probably a good move for Brewin and certainly puts the industry on notice that costs are under pressure, even in the manager of managers space.’