Charging Structure for:

Transcription

1 Charging Structure for: Partner Profiles Only Profiles Acumen (100% Passive) Portfolios Ben Raven Head of Proposition 1

2 Introduction The launch of the Centralised Investment Proposition (CIP) has led to an increase in the number of investment solutions our registered individuals and appointed representatives can recommend to clients. Clarity is required over the total charges applicable to clients when making these recommendations as different costs are charged for in different ways. It is also difficult to quantify all the charges with certainty. Historically, an Annual Management Charge (AMC) was used to show how much a client paid over the course of a year to be invested in a fund. Additional expenses such as administration costs, custodial fees, legal and audit fees were then included to arrive at an Ongoing Charges Figure (OCF), designed to give clients a better understanding of the total annual charges involved with being invested in that same fund. The OCF may also include the amortisation of fund set-up costs and certain other annual expenses. It is s belief that the OCF alone is insufficient to use as best practice in setting a client s expectations as it focuses solely on costs that are expected to recur consistently each year. It therefore excludes one-off expenses such as trading costs (even though actively managed funds are continually traded), as well as the impact of bid-offer spreads and stamp duty (on the purchase of UK equities) on the net performance of the fund. Any fund incurs these expenses so clients only benefit from the net returns of the fund once all these costs have been accounted for. Combining the OCF with a fund s trading costs gives a true indication of the amount a client pays each year to hold their investment. In addition to the average OCF of 1.19%, the average impact of trading costs on an actively managed fund is 1.44% per annum. This figure is based on extensive research by Roger Edelen, Richard Evans and Gregory Kadlec in 2013, published in a paper entitled Shedding Light on Invisible Costs: Trading Costs and Mutual Fund Performance covering a sample of 1,758 funds. This paper aims to clarify how a client pays all these charges either through an ongoing/annual fee, or through receiving lower net performance from their investment. With the client at the forefront of our minds, Wealth publish the Acumen Portfolio OCFs (1.16%) inclusive of all trading and associated costs. The typical active manager does not publish trading costs in their OCF in an attempt to make the client s total annual charges appear lower. This paper is designed to give a like for like comparison of the total annual charges for Partner profiles, Only profiles and Acumen Portfolios. In this paper we break total annual charges down into three broad categories; DFM charges, Ongoing charges of the underlying portfolio and Cost of trading the portfolio. 2

3 Objectives This paper provides: Definitions of all charges applicable to clients & all other costs incurred A charging schedule for all Profiles. This includes Partner profiles, Only profiles and Acumen (100% Passive) Portfolios. A Frequently Asked Questions section to aid advisers in explaining the differences in cost of each profile Definitions of all charges applicable to clients The following charges and expenses are applicable to, and paid by, all clients: DFM charge: DFM charge The fee a Discretionary Fund Manager (DFM) charges for investing the client s money Ongoing charges of the underlying portfolio: AMC of underlying funds Additional costs of underlying funds The aggregate annual management charges of the underlying fund managers The aggregate administrative/custodial/audit/legal costs of the underlying funds Cost of trading the portfolio: Trading costs Dealing charges, the impact of bid-offer spreads and stamp duty on UK equities 3

4 Charging Schedule Charging schedule for all CIP options using the example of Risk Profile 6 Charge for client DFM charge Arjent Bordier King & Shaxon Kleinwort Benson Newscape Only Acumen (100% Passive) DFM Fee 0.30% 0.30% 0.40% 0.30% 0.30% 0.175% N/A Ongoing charges of the underlying portfolio* AMC 0.71% 0.74% 0.40%** 0.72% 0.65% 0.73% 0.75% Admin Costs 0.10% 0.13% 0.08%** 0.10% 0.15% 0.10% 0.11% Cost of trading the portfolio*** Passive 0.15% 0.15% N/A 0.15% 0.15% 0.15% 0.30% Active 0.72% 0.72% 1.44% 0.72% 0.72% 0.72% N/A Total Annual Charges 1.98% 2.04% 2.32% 1.99% 1.97% 1.875% 1.16% Source of data: *Ongoing charges of the underlying portfolio: AMC FE Analytics (October 2014). Admin Costs FE Analytics (October 2014) OCFs for Profiles on Novia can be reconciled with the above table by totalling the AMC, Admin Costs and Passive cost of trading the portfolio **King & Shaxon ongoing charges of the underlying portfolio: King & Shaxon trade single equities. The OCF provided was 0.48%. For the above table this has been split into an AMC of 0.40% and admin costs of 0.08% ***Cost of trading the portfolio: Passive Acumen KIID (October 2014). Active Shedding Light on Invisible Costs: Trading Costs and Mutual Fund Performance, Roger Edelen, Richard Evans and Gregory Kadlec (2013) 4

5 Frequently Asked Questions Ongoing charges of the underlying portfolio - Have my clients always paid these AMCs and admin costs? Yes - These are the cumulative charges of all the funds in a client s portfolio and all of them impact fund performance (accounting for the difference between gross and net performance). As such they are not always explicitly conveyed to the client as costs they are bearing. Advisers should make it clear that these indirect charges are always paid by the client. Cost of trading the portfolio - How are Acumen Funds able to trade the portfolio at such a low annual cost when trading ETFs can be expensive? Acumen Portfolios are able to trade the portfolio at such a low annual cost because they have been set up as UCITS IV compliant subfunds of the Acumen OEIC (Open Ended Investment Company). These sub-funds are run by Wealth with the support of their Authorised Corporate Director (ACD) a company called IFSL. The cost of trading/re-balancing the Acumen sub-funds is 0.30% per annum given the benefits of trading ETFs in an OEIC structure as opposed trading a basket of individual ETFs on a platform. On a platform dealing costs of 15 per ETF can have a disproportionate effect on an individual client s portfolio. An example would be: A client who invests 50,000 in any PROFILE will have a 50% allocation ( 25,000) to a basket of index trackers in the form of ETFs. If we assume there are 25 ETFs, the client immediately loses 1.5% of their capital value (being 25 x 15 as a percentage of 25,000). Making the same investment into an identical basket of holdings within a UCITS IV compliant fund costs nothing. If the same client were to subsequently increase their overall investment by, say 2,000 per month via a savings plan, a further 1,000 would be invested in the same 25 ETFs each month. This could potentially cost the client 37.5% of the additional capital invested each month. Whenever possible, trades within a portfolio are aggregated to spread the cost of dealing between multiple clients, so the above is a worst case scenario. However, our view is that every individual client should be protected from this risk regardless of the timing of their investment. 5

6 Frequently Asked Questions Continued What is the difference between the AMC and OCF of a fund? Historically, an Annual Management Charge (AMC) was used to show how much a client paid over the course of a year to be invested in a fund. The AMC is the gross fee paid to the fund manager before they pay the ACD and other fixed costs. Additional expenses such as administration costs, custodial fees, legal and audit fees were then included to arrive at an Ongoing Charges Figure (OCF), designed to give client s a better understanding of the total charges involved with being invested in that same fund each year. In this document these additional fees are referred to as admin costs. The OCF may also include the amortisation of fund set-up costs and certain other annual expenses. Why is it generally more expensive to trade an active portfolio than a passive? Active managers incur higher trading costs than passive equivalents as they are regularly trading in and out of the market in an attempt to out-perform their benchmark and generate alpha. The more an active manager trades in and out of positions, the more these costs rise. Novia publish OCF numbers that do not appear in the table on page 4 how can we reconcile these? In order to reconcile the Novia OCFs, one need simply refer to the table and combine the AMC, Admin costs and Passive cost of trading the portfolio. The table is presented in this way to clearly compare all aspects of the profiles given Acumen publish all trading costs in their OCF and the active managers (across all profiles) do not. Aside from those listed in the table on page 4, what costs will my clients be paying? The client will also pay an annual adviser charge (1%) and a platform charge (0.30% on Novia). 6