The topic of charges and fees is usually on the regulator’s radar. The RDR published in 2012 aimed to rectify ‘opaque charging structures’ within the advice market and since then the regulator has kept a close eye on the matter. Recently the FCA conducted a deep dive review of Adviser charging structures in its newly published Adviser survey report which found that 89% of the respondent advisers charged clients percentage fee, 44% had fixed fees and 27% reported hourly charges (titled ‘FCA survey of firms providing financial advice’, published on the 1st of July 2016 –click here to read in full). On the provider side too, across Europe there have been calls for improvement in the communication of fees and charging structures to the end investor (via KIIDS, PRIPS) in a bid to help investors navigate through the variety of charges that can erode/affect their portfolio. However, most investors remain unaware of hidden costs that are unaccounted for in glossy literature from product providers.
A big part of the role of a Financial Planner or IFA is to provide clients with an understanding of costs, discuss their impact and assess the investor’s attitudes towards them, as this will play a key part in establishing the suitability of that investment product for the client (the FE Adviser Survey 2016 found that 37% of the respondents rated costs as the most important attribute when reviewing investment options for clients).
The financial market today is rich in diversity with solutions that address cost sensitivity and accommodate a variety of investor types but more often than not Advisers have to blend solutions to balance out the holy trinity of performance, charges and risk management.
Ongoing Charges Figure (OCF) and Total Expense Ratio (TER)
When looking at costs, it’s sensible to begin by looking at the OCF or TER of instruments. These metrics offer an inclusive measure of the total costs associated with managing and operating the investment including management fees and additional expenses such as trading fees, legal fees and other operational expenses. The total costs of the fund are added and then divided by the fund’s total assets to arrive at a percentage amount which denotes the fund’s OCF/TER. The size of the TER is important to investors, as the costs that come out of the fund affect overall investor returns. The TER is particularly significant when researching actively managed funds, as the operational and manager costs associated with these instruments are likely to be higher. Some of the most well revered funds like Invesco Perpetual High Income and BlackRock Gold and General have OCFs of 0.92% and 1.17% respectively (as of August 2016). Trackers or passives on the other hand can have charges as low as 0.5%.
So how accessible and easy to find are these costs?
Well, it can be quite challenging to trawl multiple asset manager websites to understand and compare charges (thisismoney.co.uk once suggested that one needs to be Sherlock Holmes to find the figures on fund manager websites).
FE Analytics offers users the ability to scan fund costs across different fund universes, alongside the flexibility to make a shortlist of funds based on their OCF. Let’s say for instance, the investor was looking to reap the benefits of active management and you decide to include a high income fund to their portfolio – as seen below you can filter down from over 3,000 funds in the IA universe based on their investment focus (high income) and further down to 83 funds based on a OCF of less than 2%.
This methodology can be repeated for other investment types as well to make sure you are selecting the best and most suitable investment option for clients. The images below show a filter of the FE’s Risk Targeted Multi-Asset universe and the FE- Rated Passive investments universe looking at funds that have an OCF of less than 0.1%.
Alternatively, you can access a breakdown of the charges in the fund’s factsheet within the system.
Adviser and Platform charges
Once a group of instruments have been selected and modelled into a portfolio the underlying charge of all the funds are automatically deducted by the system. Furthermore, FE Analytics allows the user to include additional charges like Adviser fees and platform fees to reflect the true value of the portfolio.
Image 1 shows return without Adviser charges and image 2 after additional charges.
N.B. This portfolio consists of two income funds, two multi-asset funds and two trackers. It was created purely for illustrative purposes and has assumed an Adviser charge of 2%.
As more Advisers turn to discretionary portfolio providers, FE Analytics now offers users the ability to review DFM charges via the inbuilt FE Transmission directory that holds comprehensive information on many of the most commonly used discretionary model portfolios in the UK. Advisers are able to compare the costs of purchasing constituent funds individually on a platform versus the portfolio as a whole to communicate the value of using DFMs to clients.
A good client service proposition will empower the investor by giving them a good understanding of their financial situation. But more often than not explaining the complexity of our industry’s charging structure to clients without jargon can be challenging and in some serious cases lead to misinterpretation or misunderstanding by the client.
Within FE Analytics sits a comprehensive Glossary & Statistical Calculation document that provides a summary of the types of charges in a simple easy to understand manner that can be forwarded on to clients. This terminology is also automatically included in the portfolio reporting generated from the system that can be customised to suit the specific needs of a client.
At FE we recognise that there is still room for improvement in transparency within the asset management industry. We have made it our mission to use our strategic position in the industry to promote clarity and openness to help advisers and investors navigate this.
Contact us at firstname.lastname@example.org if you would like to find out more.