How to talk about fund fees with clients

By Hope William-Smith

Go to the profile of Money Marketing
Feb 14, 2018

The new European Mifid II regulations encouraging more transparency for investors have put a greater focus on the way advisers explain fund fees to clients. This week, Money Marketing talks to two advisers about their efforts to improve clarity at a time of change for the sector.

How do you present fees to clients?

Blue Wealth Capital independent financial planner Raj Shah: We explain everything on charges.

We tell clients that fund managers will charge them for investments; they receive a commission, which also has to be disclosed.

They may also receive money from stock lending and there may be additional charges for entering and exiting the investment too, so we explain how that works and why that is in place.

When describing the difference between holding a fund and holding individual shares, I use the elevator analogy.

If all of a client’s money is invested in one share, such as Apple, I describe an elevator that is being supported by just one wire. Invested in a fund, you have got between five and 15,000 wires holding your elevator up.

What you are paying for is the fund manager. If one of the wires holding the elevator up becomes a bit weak, you exchange it for a stronger wire. This is what you are paying for.

So make sure that all the wires that are holding your elevator up are fit for purpose.

Candid Financial Advice director Justin Modray: We have always shown clients fund fees in the Key Information Document, but these documents are quite confusing now under Mifid II.

In the advice reports we give to clients, we have always listed the funds’ ongoing charges figure, and if there is a performance fee we also explain how that works.

We put fees in percentage terms for individual funds, and in total, but also state them in pounds and pence, depending on how much the client is investing.

The change in the new KID is transaction costs on funds – the so-called “total cost of ownership”. We are struggling because fund groups are not clearly explaining this. We cannot find transaction figures on the company’s websites, or some of them are there but they are not yet in the KID.

How are you explaining the new costs rules?

Modray: We have approached transaction costs with clients, explaining what it means, and so far we’ve had no reaction. No one has expressed any excitement or unhappiness, as nothing has changed in terms of what they were paying before.

People do not fully understand transaction costs because it is still a new concept, but on the basis they have already been paying, if a fund ultimately performs well, they are not going to worry too much about extra charges.

Shah: It’s great there is more transparency now – it can only be better for the customer. With the disclosure of transaction costs, some of the fund charges have increased by 20 per cent, Vanguard included.

More transparency in companies like St James’ Place means they have become more cost conscious for the people marketing funds, so time will tell how they spin this into a positive message.

What is your approach to fees when selecting funds?

Modray: Most funds we use charge around 0.1 to 0.15 per cent in fees; some others 0.6 to 0.9 per cent. If we had to use funds that cost 1.5 per cent, there would probably be an issue for the client. That said, we have not been in that situation before because we have never felt a more expensive fund is worthwhile.

The most expensive fund we use at the moment is the Fundsmith Equity fund, which has an OCF of 0.99 per cent, which is pretty high. We are not particularly comfortable with that, but manager Terry Smith has proven to be very good so far, and because performance has been so good, clients are relaxed about the higher fees.

Shah: Ultimately, you want the money to work as hard for your client as possible. We tend to look for companies that offer very conservative and low cost solutions. Mainly these companies are Vanguard, Dimensional, BlackRock, as a lot of their fees are totally transparent.

Do you have any other tips for advisers?

Modray: Try and present costs and charges as clearly and as simply as possible. You need to be 100 per cent upfront and show them exactly what they are likely to pay before they get anywhere close to making a decision on whether to use you or not.

Clients are generally fairly sensible people. They can make up their own minds as to whether they think something is good value for money or not.

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Money Marketing

Money Marketing, Centaur

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John 6 months ago