Cost of investing

I have commented in the past that financial advisers and wealth managers are currently in love with what are called multi asset solutions. I have deep suspicions about many of these offerings which sound to me like a re-invention of the bad old life assurance bonds that were often used by advisers to package up asset management processes in such a way that they could ‘milk’ large fees from the clients’ funds.

Reading a trade publication produced by Incisive Media which is focused on the multi asset fund management story I extracted a number of comments from experienced objective writers and from the fund managers offering these solutions that did nothing to disperse my concerns.

An ‘old hand’ like myself retraced the history of advisers offering ‘managed funds’ back to the aforesaid life assurance bonds with their 5% initial commissions and up to 1% a year trail fee (paid for doing nothing most of the time). He clearly had the same sceptical view as me – we have both been around the block, as they say.

A fund manager stated that as consumers would be expected to pay 2% per annum as the cost of owning an investment and 1% would go to the IFA, and 0.25% to the dealing platform, that left 0.75% for his firm to actually look after the money, which he thought was fine. He did not comment on the obvious disparity of the adviser charging 1% for doing nothing other than funnel money in his direction.

Another analyst confirmed that the multi asset offerings that access investment markets using ETFs (Exchange Traded Funds – see Glossary) and passive investments, on average made more money than products that invested in a range of the supplier’s in house funds and the latter in turn make more money on average than offerings that invest in a wider market and have ‘double’ fees as a result. So fees impact on performance. But the differences in fees between these variants was much smaller than the level of advisers’ fees!

I have believed for a very long time that an investment process that involves a client filling in a simplistic questionnaire to deliver a numeric score and then be given a ‘managed’ or multi asset portfolio that is maintained by an institution to meet an investment objective that is claimed to be consistent with that score based on quantitive modelling is for a start intellectually dubious.

But what is worse, is that having gone through that process, most advisers will do nothing but ‘pipeline’ the reporting of the portfolio from the institutional fund manager on to the client and do absolutely nothing else unless asked to by the client. Oh joy, have we got back to 1% trail commission and paying advisers to play golf and sail their yachts!

I am not by the way saying that appropriate multi assets solutions will not suit some requirements – there are good ones at decent prices that can be part of a portfolio or in rare cases, would be sensible for an entire portfolio. I am just saying that investors need to know who is doing the ‘heavy lifting’ in looking after their money and who is laughing all the way to the bank.

I read today the comments for shareholders from the Quilter asset management business (pun in the title intended).

A summary of one section would be that profits have gone up even though inflows fell and assets under management slipped a little due to the decline in market values. Margins have increased and selling off a single asset business (ie a service that offered different funds for different markets segments) will have helped, they say.

In another post I have commented recently that the ‘push’ of multi-asset propositions to retail investors is all about increasing profits for fund managers and advisers. It will be argued that the end client gets a better offering, but the evidence of that is thin on the ground. After all, ‘better’ has to be compared with something and I don’t ever see such comparisons!

This is more evidence of the underlying reasons as to why investors are being told that they now need an adviser (IFA) to tell them to invest with another adviser (asset manager) who will pick yet other advisers (fund managers) to buy them investments. That is 3 levels of fees for one result!

Sounds like the football team with a Director of Sport, a manager and a coach! But quite likely no decent strikers.