It is a sad fact of investment management that the fees investors pay are inherently opaque.

There have been a number of improvements to transparency, which in broad chronological order are:

  • The abolition of commissions for most firms at the end of 2012. Some “vertically integrated” firms, who produce and distribute their own investments can effectively make margins on advice, fund management and the technology that hold the funds, but bona fide independent firms should charge a clear and not-misleading fee for advice provided
  • The trend to more disclosure on fund costs. Historically firms had charged an explicit annual management charge, but did not disclose other expenses levied to the funds, for example accounting fees, research fees etc. it is a source of aggravation to me that they could charge for a service, and then deduct other costs from investors’ funds, but at least now they are more transparent. It is for this reason that the Annual Management Charge (AMC – the explicit fee) is less useful than the Total Expense Ratio (TER) or Ongoing Charges Figure (OCF), which should more accurately reflect the real cost of running a fund (though necessarily these are only estimates)
  • Finally, MIFID2 has forced firms providing advice and/or investment management services make clearer the charges they levy, and it is this point that I am focusing on today

Our stance

We have been unequivocally in favour of transparency:

  • Since Wingate Financial Planning’s inception in 2008 we have offered a clear “fee for service” approach – we have not operated a commission model, even when it was technically allowable
  • We have always pressed for greater transparency with fund managers, endeavouring to use TERs/OCFs in our communications with clients
  • We accept that not all individuals process information in the same way and quote fees both in %age terms, which is common throughout financial services, but also in £ note terms which we think is more readily understandable by most people
  • We have preferred to work with firms who, like us, charge a single clear fee, and do not charge penalties, dealing fees, retention fees, etc.
  • We also prefer it that fees should also reduce, proportionately, as asset values increase: it is not doubly expensive to service a pot twice the size

What’s changing

MIFID2 is set to shake-up those that do not support transparency, and instead hide their fees (invariably because they are high). The rules came in early 2018, but with a year’s effective grace period, the laggards have had to be dragged to take up the new rules. There is also strong evidence a number of firms are still failing to comply with the rules.

I can explain this woeful approach, and lack of transparency, with an example.

New clients, Mr & Mrs Wood (a married couple) were dissatisfied with the service they were getting from their Discretionary Fund Manager (DFM or stockbroker): there was no financial planning, no tax advice, and they felt their money belonged to the DFM – they had to ask permission to use it. They were in a similar position to John and Jackie, in that they did not understand they could draw (in their situation) £80,000pa from their portfolio with almost no tax to pay. Mr & Mrs Wood did, however, get a very weighty, glossy report, and a nice lunch in a west-end office.

The way we work, and based on the services we explained we could offer,they felt they would be getting far more service with Wingate Financial Planning, and be able to make far more efficient use of their monies, their only (small) bugbear was cost:

  • They were ostensibly paying their DFM 1% pa (plus VAT so 1.2% pa) but discounted to 0.8% + VAT, and 0.6% + VAT at certain stages. Mr Wood had worked out it was slightly less than 1% per annum.
  • We explained the cost of a similar appropriate arrangement with us would also be around 1.2% pa (c. 0.6%pa for our services, 0.2%pa for an administration platform to keep their assets, and 0.4%pa for an appropriate portfolio of fund – this last point could be less for lower risk, and more for higher risk – it was indicative only)

But there would be some capital gains tax, and to get them to where they needed to be, recommendation and implementation fees to move them. After some discussions, and thought, they agreed the value for money would be greater, and it was a long-term investment so they decided to move.

We then undertook the agreed analysis on their portfolio to identify what we would recommend they keep and what they would change, in doing this analysis we learnt:

  • There was nearly no discount on the 1%pa + VAT. This is because they were treated as three separate people: Mr’s portfolio, Mrs’ portfolio and the joint (Mr & Mrs) portfolio
  • The 1%pa + VAT covered only the actively managed investment management services, and not
  • The 0.8%pa for the underlying investment funds, nor
  • The trading fees of c. 0.25% per trade (with a minimum and maximum expressed as £), nor
  • Some of the investments also had a difference between the buying and selling price, which effectively becomes a further cost of dealing

The defence of the last fee was “we rarely” trade, which of course undermines an active investment strategy! But nevertheless the annual costs once all the above were taken into account was over 2% and approaching 2½%.

In the next month this approach should not be theoretically possible, with managers needing to disclose every line of expense to clients, but that assumes they abide by the rules. For those that do, I expect some fairly pointed questions where people start to query the value they are provided.

For us it’s a potential opportunity as, to a large extent, it’s business as usual, but finally we find ourselves on a more equal footing. Our mantra for this work, when in “competition” with these larger wealth managers, stockbrokers or discretionary fund managers is, invariably, we do far more and charge far less. The above example shows why.

NB: The above case study is based on a real couple, but some of the details have been changed for confidentiality.

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