This week Heather Hopkins (@heatherahopkins) and Sophie Huang consider fees, transparency and the case for financial planning.
How do IFAs select DFMs? A round of golf, a dinner a few times a year – these are some of the ways that the old school DFMs describe their meetings with the financial advisers they work with. This may seem like an era long left behind but in fact, among those managing money for the 1 per cent – or even perhaps the 3 per cent – these very civilised business practices still exist.
Financial advisers operating at the top end of the market have long-standing relationships with discretionary managers. The decision to work with a firm or individual is not taken lightly. This is a relationship-based choice, and it is often a relationship that lasts a career.
For those working with very desirable clients but ones who don’t need to be wined and dined, the criteria are a bit different. Charges top the list. Today we published a report on DFMs, their role in fund distribution, fund selection and their relationship with financial advisers. 87 per cent of advisers said charges were among the top 5 most important criteria in selecting a DFM, followed by investment performance (selected by 81 per cent).
In the coming months we will be exploring this issue of cost across the various parts of the value chain. We want to understand how advisers are comparing costs. We also want to understand the total cost of ownership (TCO) whether a client buys direct, is advised, is on an advised platform or has money managed by a DFM. Don’t expect a clear-cut number because the complexity of this subject matter will likely make a single TCO figure quite meaningless. Rather, we will explore some of the complexities to help illuminate charges and provide some bases for comparisons.
The role of the financial adviser is not just to compare the costs of discretionary fund managers. This scrutiny helps but is not enough to justify one’s place in the value chain. We are already seeing an increased demand for financial advice and holistic retirement planning. We expect that demand to continue to rise.
Financial planning is an ongoing process to help clients make sensible decisions about money and to help them achieve their goals in life. It involves cash flow planning, tax planning, putting appropriate wills in place and thinking about how to cope should unforeseen events alter income flows or cash flow needs.
Financial planning requires a different focus than running money. The major changes to the taxation of savings and dividends as well as IHT should give advisers plenty to think about. The case for them to exploit comparative advantage by focusing on planning is there.
We’d be remiss, after several paragraphs on fees and charges not to acknowledge the elephant in the room – the high profile kerfuffle at the Investment Association. So far the story doesn’t seem to have captured the attention of those outside of the industry but time will tell whether the story builds or dies.
Whatever the outcome of this week’s IA ousting, we know advisers are already scrutinising costs closely, after all they are on the front-line defending fees.