Keep calm and carry on…ex-post

MiFID II may not have had you on the edge of your seat, but those who recall its introduction at the start of last year will be aware that the first batch of ex-post statements is about to land on investors’ doorsteps. For the non-Latin speakers amongst you, ex-post means ‘after the fact’. Under MiFID II, advisers are required to disclose all personalised and aggregated costs and charges to investors, as a forecast (ex-ante) and then actual costs incurred (ex-post). The aim is to give investors a transparent picture of how the costs they incur relate to their returns, enabling them to make informed decisions about the value of the service they’re receiving.

But with the arrival of the ex-post statements, clients are about to see their costs with little context of what they’re actually paying for. They want to know that they are receiving value for money and although charges haven’t changed, there might be some concern when they see the granular detail on costs for the first time, and without the full context.

It might be worthwhile discussing these costs the way you might discuss the costs of buying and running a car. The more you get out of it, the more it will cost you. Clients who’ve opted for discretionary fund management have already made the decision that they want more than the basic model – the low-cost, fuel-efficient Ford Ka that will get you from A to B, and comfort doesn’t matter. But DFM clients have in effect opted for a more personalised and better driving experience and performance. It comes with more power, more bells and whistles, more comfortable seats that conform to the individual driver, and different sets of tires for different conditions. It's one that actually enhances holidays, family visits, weekend trips to the beach or just the daily school run. But of course it means spending a bit more up front and on the annual running costs.

Whether you think of it as just doing a job, or a thing of pleasure, you’re weighing up the costs and benefits of owning a car. Shouldn’t we think of the personalised service offering of DFM in the same way? More BMW series 7 than Ford Ka?

So here are some things to consider:

Transaction costs

As with a new car, you take a hit up front as soon as you drive it off the forecourt. The year-one purchase costs of investing cash (or other assets) in order to create the right bespoke portfolio will incur some upfront costs.

Transaction costs can also vary for other reasons. Take the latest period of volatility for example: an active portfolio manager may have taken profits after the strong gains, and then taken advantage of the sharp declines to buy more attractively valued shares. Transaction costs will have gone up, but this is what we pay active managers to do – to actively secure the best risk-adjusted returns. A passive fund may be cheaper, and perfectly fine if you just want the basics, but all it can do is follow the gyrations of the markets.

Or take the case of a client who has only recently invested. Putting that money to work initially will cause an unexpected spike in ex-post reporting, so a quick explanation should avert any shock.

Personalisation

Discretionary fund management is a broad term which encompasses a range of personalisation. What is best for a client will depend on their personal circumstances, the complexity of their tax and financial affairs, what they would like to achieve with their wealth and how much contact they need to have with the person managing their investments, among many other factors.

The level of personalisation can vary widely, and the costs also vary accordingly. You wouldn’t expect a BMW 1 series and 8 series to cost the same, even though the basic engine design may not be all that different.

Don’t forget about all the other services an active fund manager provides. For one, CGT management is virtually a career in itself. It’s obviously great when investment decisions go to plan, but these upswings can swell capital gains liabilities. It takes time and skill to manage these on a client’s behalf and make sure that the benefits of a smart investment decision don’t get eroded by tax more than necessary. Like a long car journey, the farther you go the more you’ll see the benefits of high performance and comfort.

The cost of meeting clients’ investment objectives will rise according to time horizon and complexity, much like the costs of a long and complicated car journey would. Some objectives will require higher maintenance and greater demands on a manager’s time. This time is invisible to clients but inevitably, comes at a cost. After all, that extra petrol isn’t just given away.

Different types of investment will also affect costs. For example, the cost of buying and selling property is much higher than that of bonds. Clients may not appreciate the different charges when they are deciding their investment preferences, but their ex-post calculation will show just how varied costs can be. A quick explanation should alleviate any potentially nasty surprises.

You get what you pay for

There will be times when costs are too high, but in general, the charges should reflect the level of service clients receive. So when all the ex-post disclosures are laid out, ask whether or not the client is getting the right level of service for the price they are paying. The more bespoke and personal the service, the more it will cost. After all, you generally get what you pay for, and value for money is not just about price.

Take ex-post as an opportunity to discuss the benefits of the service. This level of transparency gives clients real insight into the value of active management, and when combined with good performance, they can fully enjoy the journey that lies ahead in the knowledge that they’re getting the level of service and personalisation that’s best for them.

Read more on this topic in our recent two-part report, The value of discretionary fund management.