Leading discretionary fund managers (DFMs) have rejected a report’s insinuations that their costs are excessive and opaque.
Analysis by the Lang Cat, a consultancy, on behalf of Skandia, highlighted apparently wide disparities in costs between several DFMs.
For example, the paper claimed that an ISA of £250,000 managed for 10 years by Brooks Macdonald through Novia would incur a total cost of ownership of 1.75% compared with 1.12% for an equivalent investment in the WealthSelect 5 portfolio through Skandia.
Over the same timeframe and with the same ISA, the research reported total costs of ownership of 1.54% for Brewin Dolphin’s service and 1.41% for London & Capital, both through Novia.
Mark Polson, principal at the Lang Cat, observed that ‘below the surface in the murky world of fund costs’ he had found ‘much higher usage of passive and ETF instruments’ among DFMs.
Gareth Johnson, head of managed investment services at Brewin Dolphin, insisted that there was nothing murky about his firm’s costs.
‘Our managed funds service via platforms has always had transparency at its heart,’ he told Wealth Manager.
‘Our total fee, 0.36% inclusive of VAT, is the same across all platforms, the same across all wrappers and is not dependent on the level of investment. The fee is deducted monthly and is shown on client statements via the platform. The TERs are clearly listed through each platform and indeed we publish our holdings monthly via our website, which hosts the factsheets for the service.’
Richard Leigh, managing director and head of adviser solutions at London & Capital, felt that the paper ‘made interesting reading’ and agreed that ‘fees do create a lag on performance’.
Leigh stated that London & Capital had therefore set a price of 0.25% for its managed portfolios, targeting an overall cost of ownership range of between 1.19% and 1.36%.
Value, not price
Brewin Dolphin, Brooks Macdonald and London & Capital also all emphasised the importance of value rather than simply price.
‘We do not select funds based purely on cost and review each fund based on the rigorous due diligence process which is whole of market, best of breed and includes a full qualitative and quantitative analysis before it goes onto our buy list,’ remarked Brewin’s Johnson.
‘The share classes may differ between platforms but we will always seek to invest in the lowest cost version of the fund selected for our models.’
A spokesperson for Brooks Macdonald told Wealth Manager that the firm was ‘a performance-driven DFM which does not populate its portfolios with the objective of producing the lowest total cost of ownership – rather they invest to gain the best risk-adjusted returns for clients’.
Brooks Macdonald acknowledged that as such it did employ passive funds ‘where appropriate’, but only on the basis of ‘what is right for the client, not what is right for our sales proposition’.
London & Capital’s Leigh concurred that value was a greater concern than price.
‘We as a firm measure ourselves against risk-adjusted performance, so that our managed portfolios perform in all market conditions,’ he said.
‘We always aim for good performance but never aim for the best performance. It is important to take this into account and for investors not to focus on purely which managed portfolio range is the cheapest or ones that create the highest returns, as these yardsticks can be transitory.’
Leigh additionally rejected accusations that DFMs simply all populated their portfolios with the same funds rather than adding true value.
‘In terms of commonality among underlying fund selection, clearly performance influences third-party selection,’ he argued.
‘It would take a brave fund manager to be entirely contrarian in their investment choices. We aren’t really concerned with what our competitors look for in funds; we focus solely on investing in third-party funds that fit with our investment strategy and desired fund characteristics. If other firms have the same fund choices, that is purely coincidental.’
He added: ‘As long as we can demonstrate to IFAs and their clients that our selection process is methodical with a clear rationale, that is the most important aspect.’