Fowler Drew fees and all-in investment costs
How we set fees
Since we opened our doors in 2005, we have always sought to balance conflicting objectives when working out how to set fees, for a service that fully integrates financial planning and discretionary portfolio management:
the virtue of simplicity and clarity
minimising cross subsidies between clients
minimising conflicts of interest arising from different charging methods.
In the early years, when we operated like a multi-family office with a small number of self-similar clients, the fairest way was each family unit paying their fair share of the cost of the office, which meant flat fees. As the business has grown and the range of clients by type and size expanded, including endowments and charities, 'fair shares' came to mean more complex and so less rather than more transparent. Hence a progression towards a hybrid model of fixed and variable fees, by service element:
- flat fees for initial planning, independent of size
asset-based fees for goal-based discretionary management
flat or variable fees for other planning or advice needs depending on nature
Fowler Drew fees by service element
Fixed (in £) as a function of scope and complexity (typically between £2,500 and £5,000)
Independent of asset values
Discretionary portfolio management:
0.5% (0.6% after VAT) pa of assets assigned to all goal-based portfolios
Subject to reviewable annual cap of [x pre VAT] and floor of [x pre VAT] (to minimise cross subsidy)
Includes regular replanning of goals throughout the plan
Subject to cost-based flat-rate uplifts for non-standard service features
New financial planning:
New goals or radical changes to planning: flat fees (as for initial planning)
Defined Benefit Transfers: fixed plus asset-based
Collaborating with third-party specialist advisers: time based
Arranging life insurance policies:
Percentage, with £ caps (paid as commission by insurers, part rebated)
Third-party investment costs
Discretionary management involves three cost elements: our fee (as above), a set of 'platform' charges and the costs of products used as portfolio building blocks. The last two are 'third-party' costs charged by others but it is our job to select them.
Fowler Drew does not hold client money. Assets are held on an independent 'platform' providing custody and transaction functions. We minimise costs by selecting a platform that provides the most appropriate scale of charges for our clients, including family units. Platform charges are applied by client but also by type of account or tax-favoured 'wrapper', such as SIPP and ISA, or taxable General Investment Account. The cost will vary as a function of the total amount (because the fee scales are partly asset-based) and (to a lesser extent) the mix of accounts.
A goal-based 'virtual' portfolio, made up of money in these different accounts (and possibly including off-platform assets) for a single person or spouses, is constructed using a combination of risk free assets (cash and index linked gilts matched to the duration of the cash flows) and globally-diversified equity market index trackers for each market or region we allocate to at any time. These are the lowest-cost means of implementing our allocations to the systematic risk and return features of the required asset types (or market within an asset class). Because these exposures are dynamic and carry different costs, these 'product' costs will vary at different stages of a plan, independently of market movements.
Total third-party costs:
Total third-party costs across our business can be expected to range between 0.13% pa (larger accounts and/or more risk free holdings) and 0.30% (smaller accounts, all in equities).
The Fowler Drew value proposition
based on total ongoing investment costs
Since 2018 it has been an EU requirement for managers to disclose total investment costs to all clients. This requirement applies to both investment advisers and discretionary managers and makes costs for disaggregated firms like us (using platforms and external products) comparable with vertically-integrated firms like private-client stockbrokers, banks and boutique managers with their own products or offering segregated portfolios of either funds or securities.
In 2019 Fowler Drew clients' all-in costs averaged 0.61% (with a range from 0.23% to 1.16%).
The size of the range reflects the impact of a fixed-fee element for existing clients and therefore greater size dependency. New clients entirely on an asset-based fee, not affected by a floor or cap, can expect a much narrower range of 0.73% to 0.90%.
Research of other managers' cost disclosures suggests the range amongst our competitors by broadly comparable size of portfolio is 1% to 2.5%.
These costs are not like-for-like in terms of scope of service:
None of our competitors offers fully-customised goal-based portfolios with quantified outcomes and can measure (by modelling) progress towards those outcomes, including resource requirements and confidence levels
Few if any genuinely integrate continuous financial planning with the management of the portfolio or can demonstrate a formal, mathematical link between portfolio and plan.
Competitor costs at the high end might be explained by either expensive underlying investment holdings or high management charges at the firm level.
You need to form their own judgement as to which of these service attributes, those conventional managers focus on and those we do, provide more 'value for money'. This video will help you.
How we demonstrate freedom from fee bias
The charging basis matters
Watch advisers 'revealing' common conflicts of interest with their clients.
This is as bad as it gets. Only some agents exploit their clients as overtly as this but also it's possible neither party recognises what's going on. These potential conflicts apply to us too, since we also charge asset-based fees. We have to be able to demonstrate why these unavoidable differences in economic interests do not in fact taint our advice or our actions. Which we do, below.
You define the goal | The model doesn't lie | The interface doesn't conceal
How can technical solutions, a quantitative model and a shared user interface, demonstrate freedom from bias?
In this example, initial planning, working with the adviser using a shared interface to the Fowler Drew model, had defined a secondary objective for a spending plan of gifting to children, but only having met (at some agreed confidence level) the sustainable lifetime spending that is valued more highly than gifting. Gifting reduces the assets to which the manager is attaching a fee and so (in the video) is one of the examples of how a perversely-incentivised and unscrupulous adviser might avoid telling a client they can safely gift now.
The model is nerdishly objective and has been taught to abhor 'inefficient capital'. Surplus resources, not assigned a role in balancing the plan, are inefficient. The second chart is a screen shot from the user interface, shared with the client (either in a review meeting or remotely by screen sharing). It is impossible to disguise the fact that the spending objectives (thanks to achieved investment returns) are now over-funded (in this case, by a combination of the value of the portfolio assigned to the goal, employer pension contributions and a deferred final-salary pension). Gifts can be made without reducing the certainty of achieving the spending demanded by the client.
Show not tell.