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Why hasn't the wealth industry adopted a total cost methodology?

Why hasn't the wealth industry adopted a total cost methodology?

As a recent study by consultancy Lang Cat highlights wide disparities in pricing between discretionary managers, executives say an industry standard to calculate the total costs for clients is needed more than ever.

While leading discretionary managers have rejected the report’s insinuations that their costs are excessive and opaque, Mathew Philips, director at Broadstone, has called on the regulator to put its weight behind a total cost methodology.

‘There is a potential problem with all calculations of total expense ratios (TERs) because it is a moveable feast. I think the regulator should lead this. There should be a consultation; there should be a simple plan,’ Philips said.

Although he believes ‘anything that pushes [DFMs] that way has to be a good thing’, in his view the industry faces the problem of ‘over-engineering and over-complicating things’.

Rathbones and Quilter Cheviot are two wealth management firms seeking clarity. Following a Wealth Manager article on the topic in July 2012, the two companies engaged in discussions to compare their methods of calculation and came together to create a total cost protocol last year (see the final protocol here).

Pamela Reid, executive director and head of Quilter Cheviot’s Bristol office, and Paul Chavasse, Rathbones’ head of investment management, headed the initiative. Reid said the framework has been picked up and agreed in principle by a number of firms, while Brooks Macdonald have enquired about the methodology with a view to ultimately using it as a template, Reid said.

‘The fact that two big players in the DFM business [Quilter and Rathbones] have put something out means there is already a large portion of discretionary managers buying in, by the virtue that two of the larger players are doing this,’ Reid said.

‘But we would like to see that as people suddenly wake up to the fact that they do need to do something about it, they can take a look at the protocols we have put together.

‘It’s there, it’s on the shelf, just pull it off,’ she added. ‘In drafting it, I had to sit down with others and work out these figures for our proposals, so you don’t need to reinvent the wheel.’

So what is holding the industry back from adopting it as a standard?

Derek Gawne, head of Charles Stanley’s Liverpool office, believes the Rathbones-Quilter methodology has not yet been adopted by the rest of the industry because he believes ‘no-one wants to conform to somebody else’s ideas’.

‘People who will want to hide things will say their activities don’t apply to the methodology. I’ve got a feeling there are too many companies with agendas, so unless it is forced on people, there will never be a standardised TER,’ he added.

This is echoed by Broadstone’s Philips, who refuses to accept that running bespoke portfolios should be used as a justification to avoid backing a standardised methodology.

‘The banks have managed it with [their] annual percentage rate of charge, because the regulator set a clear set of rules, which said “this is how you have got to calculate your costs”.’

While there was resistance from banks, Philips said business models ‘then fell into line with the disclosure’.

‘If you’re putting costs into your model somewhere along the line, it’ll have to come out, and you’ll find that you get a commonality.’ He said a standard isn’t possible due to the bespoke nature of their services.

‘For the top tier of clients who are sophisticated, bespoke is something that is required, but that is such a thin veneer of the amount of wealth that we are talking about in the UK,’ he said. ‘Most people actually want something that works for a very clean fee and it does what it says on the tin.’

While Reid explains the Wealth Management Association (WMA) was ‘very nervous about endorsing something’, Philips believes ‘fragmented’ trade bodies have shown a lack of engagement with the industry.

‘In a sense, it’s not in the trade bodies’ interest to amalgamate. We need to see stronger voices, which need to go to our policy makers so that they don’t make bad policies,’ he added.

Dr Tim May, head of the WMA, said charging across the industry is a priority for the trade body. In relation to a methodology, he said it was ‘important to highlight the huge range of business models and charging structures across our industry. Therefore any indication of cost needs to be very flexible’.

‘We have templates available that members can use to answer specific cost queries, particularly for new clients. All these are available to view as we fully support total transparency. We are always open to discussing the issue with the industry and regulators.’

In Reid’s view, the reason the methodology has not been adopted more widely is because the WMA have not devoted enough time and resource to the issue.

A spokesperson at the Financial Conduct Authority said: ‘Firms must present their fund charges clearly and consistently so that retail investors are able to compare charges before making decisions on where to invest.’

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