Shock At Discretionary Fund Manager Charges

Shock At Discretionary Fund Manager Charges
Tawali Papua New Guinea by Julian Cohen. Why?

Some of the biggest Discretionary Fund Managers in the UK could be charging as much as they are making for their clients!

The Pink Papers Have Recently Been Glowing Red Revealing The Eye-Watering Amounts Some Discretionary Fund Managers Are Charging, Which Could 3 Per Cent Per Year Or More!


What Is A Discretionary Fund Manager?

A discretionary fund manager is a professional third party manager who sets parameters for your portfolio choices such as your risk profile and your investment preferences.  Their remit is two-fold:

To maximise growth in your portfolio.
To protect your fund against falling markets.

Why There’s So Much Chatter About Discretionary Fund Managers

It’s due to something called MiFID.  MiFID stands for Markets in Financial Instruments Directive.  It’s been in force for over six years and it’s the cornerstone of the European Union’s regulation of financial markets.

MiFID is being comprehensively revised to improve the functioning of financial markets in the light of the financial crisis, and to strengthen investor protection.  The changes are expected to take effect in January 2017.  It’ll be imaginatively known as MiFID II.

It’s not surprising that Discretionary Fund Managers are somewhat worried.  Under the proposals, wealth management firms will be required to fully unbundle their fees and charges. If the rules go through in their current form, from January 2017, Discretionary Fund Managers will have to disclose all charges as an aggregated cash amount or a percentage.

This figure will include initial and on-going costs, transaction, custody and research costs, along with performance fees and exit charges.

Like the retail distribution review which now requires advisers to transparently charge fees instead of commission, unbundling could put an end to companies cross-subsidising less profitable parts of their business. At the same time, stripping out administration costs is likely to draw attention to them as an area ripe for savings. And that’s the point.

Paying a Discretionary Fund Manager can be a very expensive business, and it’s about time they come clean on how much you’re being charged.  Here are a couple of articles worth checking out:

Discretionary Fees Laid Bare: Let The Calculations Begin...

Counting The Cost: DFMs' True Charges Revealed

Each of these articles does its best to display a breakdown of fees and charges for the biggest Discretionary Fund Managers in the UK.  Yet if you read the comments at the foot of these articles, you’ll see it’s quite possible not all the charges have been included.  Excluding these charges, you could be paying up to 3 per cent per year to have your money managed on your behalf.  Including the possible missing charges, you could be paying even more.  Here’s the rub.

If your Discretionary Fund Manager is delivering for you a gross average return of 6 per cent per year, the charges you’re suffering could be as much as you’re making net, or even more than you’re making net. 

How do you feel about that?

The Truth Of The Matter

There’s no doubt that with their extensive experience, their advanced educational credentials and their access to research tools, Discretionary Fund Managers are highly likely to deliver above average returns for some of the time.  But given the costs being deducted, it’s statistically impossible for even the best Discretionary Fund Manager in the business to consistently beat the market average over longer periods.  That’s primarily because not a single Discretionary Fund Manager anywhere in the world has a crystal ball to accurately foretell the value of the markets next year, next month, or even next week!

If you want some proof of that, read this article: Shock horror! Income Tracker Fund Beats Woodford.

Discretionary Fund Manager Or Index Tracker?

The 'active versus passive' debate is likely to continue forever, for there’s no definitive answer as to whether you should pay an ‘expert’ to manage your money, or let the market ‘manage your money’ for you.  It’s clearly all down to personal choice.  There is, however, a simple thing you can do to help indicate whether your Discretionary Fund Manager is providing you with value for money.

Ask them to summarise year by year and cumulatively for the period they’ve been looking after you exactly what fees and charges are being taken. Then have them compare the net return they’ve delivered to the net amount you would have earned from an Index Fund in the same market sector.

If they’re making you money over the return you could earn from an Index Fund, they deserve your fees. 

And if they’re not, I think you can work out the rest!

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AJ Bell Is Often The Best Value SIPP For Stockmarket Assets

That's our opinion.  Not just because AJ Bell was the first company to offer an online SIPP.  Nor that it's received many prestigious awards.  And not even because the wife of SIPPclub's Founder has an AJ Bell SIPP.  It's because it's one of the most competitive stockmarket SIPPs on the market. 

Over time, charges can wipe out a huge part of your fund.  We like AJ Bell because there are no set-up costs.  If you hold passive funds, which is our preference, or shares, investment trusts, EFTs, gilts or bonds, you pay one small fixed fee no matter how large your fund.  And when you come to draw your benefits either as occasional drawdown or UFPLS payments, there's a small charge for the whole year no matter how many times you access your money (many SIPP and SSAS providers charge more than this for each payment).  However, you should always compare charges in detail, because AJ Bell could be more expensive than other providers, depending on the type of stockmarket assets you hold.

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