Philippa Gee: Beware dangers of low-cost RDR push
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I realise it must seem with my blogs of late, that I could come across as being anti low-cost investments, but that is not the case. Please understand that I do like passive holdings and, personally, believe that they have a strong part to play when constructing an investment portfolio. I also appreciate that there are many who prefer a fully passive approach and have the research and methodology to back that up.
That is not my worry.
Instead, my concern is where advisers are using these funds for the wrong reasons.
There are some worrying signs which I see appearing, as IFAs transition their businesses to be ready for RDR. The issue is that some are switching all their clients to a purely passive approach solely because they can then add on their fee of 0.75 per cent or 1 per cent on top, without it being seen to cost the client more.
It’s not that these particular IFAs feel that the passive approach better reflects their approach to investments, or that they believe it is the most suitable form of investing for the client, but purely because it allows them to set charges without having to give further explanation. Some also see it as a way of boosting income, having moved from an active fund paying 0.5 per cent trail, to a passive fund where they can add in a 1 per cent charge.
Will this work? Well I accept that it means that the funds are unlikely to be complete howlers, which has to be a good thing. But if the intention is not the suitability of the investment, but a way to get round the fee issue, then I feel that it is destined to failure. If you are considering doing this, I urge you to rethink your strategy and if you want to charge a particular percentage fee, that is fine, just deliver the value and service to back that up. If you want clients to appreciate your work and stay with you for the long term, the passive route solely to justify fees may not be the right road for that journey.
It’s hardly TCF is it?
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Philippa Gee is managing director at Philippa Gee Wealth Management.
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Readers' comments (7)
John Phillips | 6 Aug 2012 11:57 am
You are right on the money, Phillipa; too many IFA's think it is all about cost, it is not, it is about returns for the client. Any amount of fee, charge or commission is irrelevant when you are adding actual value to the client proposition and hopefully their portfolio’s growth. Under RDR we are heading into the sub 0.5% x AUM world unless we can add real measurable value to our client proposition, once the transactional set up has been accomplished. Long gone are the days of double digit returns, year in year out, that hide the true cost of advise and fund management.
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Paul Stocks | 6 Aug 2012 12:34 pm
I fully agree with the points here - in fact a few weeks back I was going to post the very same sentiment in a thread concerning passives but felt it might be a tad controversial so I didn't. It's therefore interesting to see others thinking the same.
The active / passive choice should have nothing to do with an IFA's remuneration and I feel that using passives and taking a higher trail so that the end cost remains broadly the same is a worrying approach and could be seen as undervaluing the work the IFA is doing.
Surely it's crucial to separate out the cost of advice and the cost of everything else so that the client can clearly identify the cost of that advice and therefore perceive a value.
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John Blackmore | 6 Aug 2012 1:04 pm
will be interesting to see to see how this plays out and how many clients will accept 0.75% pa, 1% pa or increasingly even more as value.
Others will no doubt "sell" passives and then add a good deal of activity for its own sake in order to justify these higher fees and to keep the regulator happy.
With increasing regulatory costs I can see a commercial reason for advisers to charge more but is there really a reason for clients to accept such higher charges ?
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Anonymous | 6 Aug 2012 6:36 pm
I agree with Phillippa, but I have seen it before with wraps! largescale.
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Stanley Kirk | 8 Aug 2012 5:47 pm
Two factors which have been wholly ignored here.
Firstly, the investment markets are a 'zero sum' game. That means that the markets deliver a certain performance and anyone who does better does so at the expense of someone else. How much cleverer than everybody else is your fund manager? How many stupid market participants do you think there are out there? All the studies show that out performance is far more by luck than judgement, is difficult to sustain and completely impossible to predict in advance - otherwise we would all be rich - unless we're too stupid to notice the opportunity of course.
Secondly, for 'replacement' business (i.e. most business), the FSA sets tough 'Suitability' tests including justifying extra charges. The 'good practice' examples suggest that it will be very hard to justify extra cost over 1% in any circumstances. Many practitioners work to a standard of 0.5% for practical purposes as reasonably safe on extra cost suitability.
For Multi Manager DFM propositions I have seen additional costs well above 1% being promoted on grounds of 'superior investment proposition' - good luck with that one!
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Anonymous | 9 Aug 2012 9:21 am
Stanley Kirk has obviously thought this issue through with a high degree of common sense. You need a decent (educated) guess and a huge slice of luck to achieve outperformance in this business and it is nigh on impossible to sustain.
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John Blackmore | 9 Aug 2012 1:07 pm
Agree fully with Stan. The problem though is where does this leave the adviser ? Opting the "zero sum" view investors might well conclude that advisers are no longer needed and that many wrap charges are too high. Exactly what will advisers of the future do to justify 1% or more ? Calling it a fee might not be enough
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