All thoughts turn to fees…

Last year was a tumultuous year for the markets and the ride isn’t over yet. The impact of the COVID-19 crisis will last for years to come, with low growth expected across most assets. And in times of low growth, fees become even more important for Financial Advisors.

It’s nothing new: Mifid II and other scrutiny has brought increased price discipline and transparency, particularly on discretionary fund management (DFM) and fund management fees. The consensus is that costs are falling, gradually. But is that good enough?

The balancing act

Portfolio design is the main element of DFM pricing. Diversification of funds and asset classes often means balancing funds with higher fees,  with low-cost, efficient index-tracking funds in other asset classes. Whilst that blend offers diversification,  active funds should still be handled with care. Even where funds have performed well in the past, predicting the future is tricky, particularly now.  

We believe the focus should be on index-tracking management, unless there is strong evidence that active management consistently, predictably outperforms the benchmark. And of course, there are always exceptions – some asset classes such as high yield can only be accessed through active management and I’d say multi-asset credit and some property mandates are almost always better managed actively.

The impact of fees

Even relatively small fee savings can have a huge effect over time. Our Sustainable Income Tool (SIT) illustrates how much clients plan to withdraw from investment each year, showing the impact of higher and lower fees on the expected annual amount withdrawn. For example, if you can cut even 0.2% a year on fees for someone withdrawing from a pot of £500,000 over 30 years, their annual income could be £800 a year higher. That means their pot could be £50,000 higher after 30 years, thanks to compound interest.

Bring on the buying power

Institutional buying power can reduce costs as it encourages more competitive pricing – smaller DFMs tend to be more limited in their buying power. Robust governance brings a lot to the party but it does cost – better firms will have efficient, cost-effective governance frameworks, while others may be burdened by the cost of meeting their obligations. When it comes to operations, expertise and sophistication vary too, which also impacts fees.

The future of fees

Are predictions wise right now? Perhaps not, but there is definitely a growing case for disruptive pricing in the DFM marketplace. Good client outcomes need quality portfolios and low fees to flourish in low-growth times. This is something both clients and advisors want, and the regulator isn’t far behind. Further fee pressure feels inevitable.