Total Cost of Ownership - How much is too much?
Having read the article by Mark Polson from the Lang Cat below;
https://www.trustnet.com/News/705841/mark-polson-advisers-could-use-tech-to-cut-the-cost-of-investing-by-half/
I was curious to see what everyone thought was too much in terms of total ongoing costs for a client?
As he says in the article, once you add up ongoing adviser charges, platform costs, DFM fees and underlying fund costs it can be easy to end up with ongoing costs in excess of 2% and sometimes up to 4%.
Personally I think 2% for everything (we charge 0.75% pa for ongoing advice) is a reasonable maximum and anything above this is getting pretty hard to justify.
What does everyone else think?
https://www.trustnet.com/News/705841/mark-polson-advisers-could-use-tech-to-cut-the-cost-of-investing-by-half/
I was curious to see what everyone thought was too much in terms of total ongoing costs for a client?
As he says in the article, once you add up ongoing adviser charges, platform costs, DFM fees and underlying fund costs it can be easy to end up with ongoing costs in excess of 2% and sometimes up to 4%.
Personally I think 2% for everything (we charge 0.75% pa for ongoing advice) is a reasonable maximum and anything above this is getting pretty hard to justify.
What does everyone else think?
Comments
You should listen to Marks Polson recent podcast on Next Gen Planners where he questions which bits a client should be paying for (In platform land.) He believes that clients should only pay for what they need which is custody and trading, anything else benefits the IFA and they should pay for that. I happen to agree.
0.75% adviser ongoing is v.expensive if the client is in a single multi-asset fund that is reviewed once a year over the phone. It seems more reasonable if the adviser is running a model portfolio on an advisory basis with bi-annual rebalancing and a face to face visit. Whether there's more value-add in the latter compared to the former is a whole other can of worms! I've seen a few advisory models taking as little as 0.30% ongoing as they acknowledge this difference and market accordingly.
I think 2% is expensive. Breaking it down:
Underlying fund charges could be as little as 0.10-0.30% if you went fully passive, or 0.40-0.70% if active/passive blend. Platform/wrap could be had for as little as 0.20% (lower if your firm has some muscle). That gives us a range of 0.30% to 0.90% for underlying investments plus wrapper depending on investment preferences/risk profile/house view etc. So, all in with ongoing adviser charges you're looking at anything from 0.60% to 1.65%.
(p.s. DFM? Add on at least another 2% once you've taken into account their PTR, hidden charges to pay for fine dining experiences etc...)
If you look at the D2C world (I am a D2C customer as I don't need advice or planning for my simple needs at present) you have a platform that does just trading and custody, but often with good customer functionality including the ability to vary contributions, pay with debit card etc and mine will let do some basic fund research too, for next to nothing. Whack in a diverse passive strategy (say Vanguard LifeStrategy) and annual costs (for me at least) are well below 0.4%. It does make some advised platforms look a bit pricey nowadays.
I love Transact, it's a great tool.........for the adviser. Does the client appreciate all the wonderful stuff that goes on inside it - I doubt it and they can't use half of that anyway. I think that's what Mark Polson is getting at and I am in agreement that if the adviser pays, the client does too. That's where the transparency needs to be clear - you are paying x, because it costs me x to provide access to the xyz platform which has the following tools to help me do my job. The client is then in a position to decide if they think that represents value for money for them or not.
Interesting one. Should advisers consider d2c platforms too......?
Only yesterday we advised a client to use a D2C platform.
Fixed fee for our advice - without link or reference to asset values - and a simple and cheap solution for the client; who is more than capable of entering their name, address and NINo into an online app by themselves to open an ISA.
What all of this doesn't say to the client is things like how much tax we're saving them (one such simple example is reclaiming personal allowance for high earners - the taxed saved pays for a few years of ongoing advice costs in one fell swoop), or ongoing costs for looking after things such as Trust arrangements - so much is being made of fund performance and charges but that isn't even half of the true advice process if holistic financial planning is the goal. It might just be the charge is facilitated through a product because that makes more sense - we have lots of clients who pay us via direct debit so would that be included in total cost of ownership? We are fixed ongoing fees by the way if that last bit is confusing!