DFMs & Fees Transparency
There have been plenty who suggest that DFMs will willingly hide fees to give an image of cheap service charge but the new Matrix Tables on Defaqto allow the user to quickly assess fee structures with relative accuracy. There will always be unknown elements that require assumptions on the activity within portfolios but traditional methods of quoting have focussed on clarity of fees in being a primary aim of RDR in assisting an IFA in recommending the best investment solution for his or her clients.
Elements of Service Cost in Discretionary Management:
Service Charge: The charge quoted as the annual cost of managing and administering the portfolio, researching investments, asset allocation and transacting on behalf of the client. This fee also includes reporting, client meetings and other tailoring of investment service towards a bespoke client
Typically quoted at 0.75% - 1.50%
Often negotiable as Investment Amounts Increase
Dealing Fees: The added costs of dealing cover stamp duties, brokerage, and admin. Can be based on percentage of trade sums, or fixed towards each transaction.
Typically £10-£80 or 0.25% - 1.25% per transaction.
Often reduced as trade amounts increase
- Dealing in foreign securities can have higher or differential rates.
- Registering securities within mainstream nominees can incur additional admin costs
- Dividend collection from Equities can also add to the complexity of Dealing Charges
VAT: Recent interpretations of VAT suggest that DFMs may be able to avoid charging it on activities that charge a single fee where the main component is transactional rather than service based. Most DFMs have been cautious and add VAT to their Service charges but some feel confident in their interpretation to not do so.
Rate set by HMRC and non-negotiable
Performance Fees: DFMs do sometimes charge for target performance. It is a minority that do so, and the jury is out of whether the concept of a performance fee conflicts with the natural interests of the client. For some it is an unnatural charge given the service fee is based around meeting tailored benchmarks for clients. The concept of a set performance fee can be seen as encouraging excessive risk taking and setting targets outside the scope of the client mandate.
Typically 0.20% scaled towards meeting set percentage of target (or High Water Marks)
Custody Charges: Most DFMs outsource Custody to nominee accounts and some do split custody charges out of their service charge and TER. However, the most common need to factor is a Custody Charge is when a DMS is purchased directly through a Wrap Platform. Such services will remove the custody charge and allow the IFA to remunerate the Wrap Platform directly for custody.
Rates vary from 0.10% - 0.40%
Non-negotiable as far as we know
Tax Wrappers: A number of DFMs promote their own or partner tax wrappers such as SIPPs and Offshore Bonds. Many will offer these free of charge and incorporate the tax wrapper fee into the service charge, but some do split the Tax Wrapper cost out and add separate fees should the client wish to use the in-house or partner tax wrapper.
Typically in line with normal wrapper cost
Negotiable depending on funds introduced or investment service adopted
Rebates & Negotiated Discounts: Because DFMs are large investors into all sorts of assets and collectives, they can purchase external funds at institutional and discounted rates which would not be available to a retail investor or IFAs. Retail funds in particular offer initial charges and renewable trail commission on AMC for the Retail (Intermediary) share class and it is these funds that allow certain DFMs to profit from their purchase
(i) Those that refund all rebates back to the client account and focus on getting the institutional classes (where possible) for the portfolio. This makes no additional charge to a portfolio even if some funds are only issued in the retail class
(ii) Those that buy the institutional share class where possible but retain the renewal commissions when only retail share classes are available. (There is a standard claim that because funds can be purchased on behalf of many investors, and that holdings can change between DFM clients over time, they lack the technical abilities to fairly or accurately apportion such renewal commissions. There may be some truth in this claim but it should also be noted that plenty of DFMs rebate such commissions back to the portfolio value)
(iii) Firms that deliberately purchase retail classes in order to profit from trail commissions.
Rates vary dependent on fund type and are negotiable by the DFM. It should be noted that all DFMs will pass on formal discounts.
It is also worth noting that on average, DFMs report approximately 5-10% of collectives as being only available in a retail share class.
Other Potential Costs:
There are a host of other potential admin costs which range from issuing hard copy certifications, such as Share Certs, Consolidated Income or CGT Certs, or Transaction histories and formal statements. These costs are minor charges and fair to the degree that not all customers may want them.
For further information on DFM Services visit http://www.defaqto.com/adviser/ifa/insights