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Should TERs become norm for discretionary portfolios?

Should TERs become norm for discretionary portfolios?

As discretionary managers come under pressure to transparently disclose their charges, should an industry equivalent to the total expense ratio (TER) be applied to the private client world?

Some industry insiders highlight the range of business models and service levels on offer as an obstacle, alongside the fundamental difference between the private client and funds worlds, with the former providing a service rather than a product.

However, some firms are facing a growing number of enquiries about TERs on discretionary portfolios and against a backdrop of lower returns, they anticipate requests will only rise from here.

Several senior figures are calling for agreed industry guidelines that can cater for different expense components for clients, and recognise the differences in charging structures and business models within the private client investment management market.

Protocol needed

Pamela Reid, executive director at Quilter, says the firm is frequently asked for TERs for its discretionary portfolios and has devised what it terms a ‘total account cost’. This includes the company’s management fees, VAT and the charges on the underlying funds held.

‘[TERs] are actually quite a difficult thing to get your head around. It is a defined term for the funds industry and it is clear what is included in this for the fund,’ she says.

‘When you are looking at a discretionary portfolio, you have costs charged to the portfolio and then you are looking at what you are getting for that service. These are two variables outside the tight definition of the TER.’

Reid says this makes the need for an industry protocol all the more urgent, particularly as there is a question mark over what other firms are including in their calculations when competing for clients. This can create an uneven playing field if other firms are not factoring in the likes of stamp duty, VAT or cash take.

‘I think the industry and clients are calling out for this. We as an industry don’t have an industry standard. At Quilter we have the total account cost and it is clear what is included and how it is calculated,’ she said, adding that a sample portfolio is generally used so there can be some variance.

Differences in charging

Likewise, Reid stresses the difference between firms that charge an all-in management fee and those that have a combination of a fee plus dealing commissions as another big challenge.

‘If you get our total account cost compared to someone with a low fee and high transaction charges and they don’t include the transaction charges in the calculation, it is not a level playing field,’ she added.

Her sentiments are echoed by Paul Chavasse, head of investment management at Rathbones, who agrees that guidelines would be welcome.

He said his firm has also noticed a rise in the number of requests for TERs as part of advisers’ due diligence when looking to outsource.

‘We are getting more questions about TERs and they are asking for more detail than they have historically. We try to provide this, but the reality is we are blind because when they ask our competitors we don’t know what they are submitting and whether they end up comparing apples with pears,’ he said.

Nonetheless, he stresses the difficulties surrounding estimating dealing expenses – particularly as these are dependent on market conditions.

A spokesperson for Apcims said it was not an issue the trade body had been asked to address, while others in the industry question the need for an equivalent to a TER for the private client world, given the current regulatory requirements for discretionaries to provide periodic statements or contract notes to clients.

Periodic statements include a total sum of the commissions and expenses charged and initial charges. They can also include an itemised breakdown and any mark-up or mark-down imposed by the firm.

A balanced view

Asset Risk Consultants takes a more balanced view. Although director Graham Harrison sees no reason why TERs should not become the norm for all discretionary portfolios, he says the inherent bespoke nature of the industry meant a requirement to quote an ‘average’ TER would not necessarily work.

‘My view is that discretionary private clients are very keen to know the full cost of their portfolio. We routinely ask managers for annual fee statements setting out clearly first their total take for the year and in such a case if they are trading themselves or whether they are taking trading commissions,’ he said.

‘In our experience, managers are completely capable of providing this information and in particular retrocessions they have received, [as] it is already the norm for larger private clients, charities and institutions.

‘I see no reason why it won’t become the norm for all discretionary portfolios.’

Eric Clapton, managing director of Wells Capital, takes the view that guidelines are not necessary as they are already present in the retail distribution review. ‘We are in a changing world. I think guidelines are going to come whatever. You have got natural market conditions taking over,’ he said.

Wells Capital estimates the TER on an active medium risk portfolio at the firm is currently around 175 basis points (bps) before the adviser’s charge is added, which includes the annual management charge of the underlying funds, VAT, stamp duty and custodian charges.

Its passive equivalent tends to come in between 40bps and 60bps lower.

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