It is really important when undertaking due diligence to get right under the bonnet. There is not yet any regulatory pressure to show the true cost of investing – in a standard pounds-shillings-and-pence way – for discretionary services.
Do not forget, when thinking of cost, and to some extent performance, to convert this into value for money in relation to not only what the client needs but what the client wants.
Part of the discretionary management experience for clients is the service aspect. Each individual client will have a different view on how important this is and will place a value on it with each having a different view on how much to pay and to some extent, how much performance to sacrifice in return for this service.
Fraser Donaldson is insight analyst (investments) at Defaqto
Analysing costs
Fraser Donaldson points out that, as with performance, DFMs by and large show costs that reflect the way they are structured, but there is always the suspicion that structure is a way of concealing costs, although this is less likely with the clean share class regime. When looking at costs investors need to consider who needs to get paid:
• The adviser
• The discretionary portfolio manager
• The broker who undertakes the trading
• The custodian/administrator
• Managers of any underlying funds (could be internally run or by a third party)
• Even in some cases funds in underlying fund of funds!
• Adviser platform
And then there are the different fee structures:
• All-in headline fee (bundled) – may or may not include other charges
• Unbundled fees
• Part-unbundled fees
