This article was originally written for and published on FTAdviser
Discretionary Fund Managers are under pressure to perform and lower their fees. A recent survey of 100 DFMs by CoreData found the average DFM would drop a fund manager after just 10 months of underperformance and 50 per cent said they would drop the fund manager after just six months!
There is also increasing pressure on DFMs to reduce costs and many are dropping their fees but the focus on headline rates only is all wrong. Of the 69 discretionary fund management (DFM) model portfolio offerings FinalytiQ looked at recently, only 10 had all expenses included in the headline rate.
So, the assumption that a drop in headline rates would mean a reduction in overall costs may be inaccurate. In fact, this won’t be the case – expenses are simply piled in other areas. You need to add VAT, too, when you compare to, say, multi-managers.
Clients may be no better off than they were pre-RDR, and might even be much worse off. The Total Cost of Ownership for an actively-managed DFM portfolio may well touch on 3 per cent per year when you include the platform and advisory costs.
Given that cost is perhaps the most important predictor of performance, and getting full cost disclosure from some managers is like pulling teeth, how can advisers justify putting clients in a DFM proposition if the full cost of the service isn’t entirely clear? When we conduct due diligence of DFMs, transparency with costs is often a key point for us, and we tend to take the view that, if they are not being entirely clear with their costs, it’s hard to trust them in many other areas.
This is a basic fiduciary duty for any professional adviser. More so because, it is the adviser who carry most the risk and will need to deal with the fallout when clients begin to see the effect of the Total Cost of Ownership including DFM charges, Fund TER, Advise fees and off course VAT.