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

by Elsa Buchanan on Jun 18, 2014 at 07:00

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?

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