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Costs: 1% becomes 2-3% pa


FTfm, the FT’s weekly fund management supplement, carried a story on 27th October publicising a research report by broker Numis Securities on behalf of the wealth management form SCM Private showing the all-in investment costs (actually not quite all) of 13 large discretionary managers, based on a ‘typical portfolio’ of £120,000. This implies that when initial investment charges (if applicable) are amortised over 20-year assumed holding periods (OK in theory) the average is 2% pa, rather than the typical 1% pa ‘stated’ portfolio-based fee. Amortising initial costs over shorter periods the average is roughly 3%.

The FT knows full well that SCM Private, as a low-cost wealth manager, has an axe to grind but what makes SCM’s PR newsworthy now is the fact that new legislation from Europe (MiFID II) as it stands ‘will compel regulated firms to reveal to every client the complete array of costs and charges they are paying in a single aggregate figure’. That assumes that this will finally overwhelm the indifference or ignorance of consumers and put pressure on the wealth management industry’s profits like never before.

I covered this (but without the Brussels angle) in a post in March 2013: Investment costs: who cares? The Numis examples are actually higher than the 1.4-2% range I suggested but this difference may reflect not only the sample chosen but also the assumptions made about initial charges. Initial commissions on funds forming a discretionary manager’s portfolios ought no longer be a feature of service formats, after RDR, but many portfolio managers still levy initial charges on new money added to the service. In most cases, because RDR forced firms that were not vertically-integrated product manufacturers and distributors to unbundle advice costs, these initial charges are not for financial planning or advice and are best viewed as ways of loading the firm’s cost of all of its marketing activity onto the small proportion of successful prospects.

In my post, I suggested that indifference may yet survive unless disruptive business formats emerge with big marketing budgets, so consumers know there is an alternative and that not all firms are tarred with the same brush. I saw technology as the key to successful subversion of the industry’s cosy high-cost umbrella.

In a subsequent post on one disruptive new business, Nutmeg, I asked whether adopting technology only in the means of access to a service could ever be transformative if the access was to the same boring balanced portfolio solutions, wasteful of expensive labour, as underpin conventional service offerings. In the ‘Smart Money’ column in the main section of the FT on the same day as the Numis research, Pauline Skypala posed the same question about using technology to change and lower the cost of the investment process itself: ”Robo advisers’ arrive to pose challenge for investment managers’. She asks: ‘So is investment a skill, or can it be reduced to a computer programme?’ I answer that in a separate post.

#businessmodels #models #costs #investmentprocess

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