Discretionary Fund Managers question

BritishInvestor

Because_I_Can said:

dunstonh said:

I currently have a sipp with a broker who decides / controls what funds and individual shares to put in my portfolio.  It costs me 1% a year.  I don't have an IFA.

Is this what you would call a Discretionary Fund Manager?  

It could be a broker.  It could be a DFM but 1% is high for a DFM.  Normally they are around 0.2x% to 0.3x%.

Do they need to pay VAT (I am being charged)

DFMs are non VATable  but that only changed in 2021. 

Hi Dunstonh, 

I have a DFM arrangement in place currently, completely bespoke to me so VAT is charged which I understand is correct.  On a portfolio of around £1.6m, I’m paying 0.65% plus VAT of 0.13% - does that rate sound in the right ball park for my type of arrangement and pot size?  

On a side note, my FA charge was reduced to 0.35%.  I’m also exploring a potential move to an IFA at some point this year. 

You are paying ~2 times as much for the DFM than the FA. Given that investment management is commoditised, I'd be interested to understand what value you are receiving for the annual five-figure sum.

Because_I_Can

dunstonh said:

I have a DFM arrangement in place currently, completely bespoke to me so VAT is charged which I understand is correct.

I just looked it up.  However, there are still differences of opinions in some areas but from what I can see.....  DFMs that are arranged without an intermediary (i.e. IFA / FA) are still VATable.   Where there is an intermediary, they are non-VATable.   

A second stage to that where there is a model portfolio and is using a fund style structure (so not bespoke), then they are exempt from VAT.  This was to allow a level playing field.   Bespoke portfolios are VATable.

On a side note, my FA charge was reduced to 0.35%.  I’m also exploring a potential move to an IFA at some point this year. 

That will likely become more common as the FCA is apparently preparing to run a review of adviser charging and what people are getting for their money.    Mainly on the back of the number of firms that are using DFMs nowadays and getting the client to pay for it on top of the IFA/FA charge that isn't reduced despite the adviser doing less work.

Thanks for your thoughts dunstonh.  And in terms of the DFM fee (on a portfolio of around £1.6m - 0.65% plus VAT of 0.13%),  does that rate sound reasonable for my type of arrangement and pot size?  

Because_I_Can

BritishInvestor said:

Because_I_Can said:

dunstonh said:

I currently have a sipp with a broker who decides / controls what funds and individual shares to put in my portfolio.  It costs me 1% a year.  I don't have an IFA.

Is this what you would call a Discretionary Fund Manager?  

It could be a broker.  It could be a DFM but 1% is high for a DFM.  Normally they are around 0.2x% to 0.3x%.

Do they need to pay VAT (I am being charged)

DFMs are non VATable  but that only changed in 2021. 

Hi Dunstonh, 

I have a DFM arrangement in place currently, completely bespoke to me so VAT is charged which I understand is correct.  On a portfolio of around £1.6m, I’m paying 0.65% plus VAT of 0.13% - does that rate sound in the right ball park for my type of arrangement and pot size?  

On a side note, my FA charge was reduced to 0.35%.  I’m also exploring a potential move to an IFA at some point this year. 

You are paying ~2 times as much for the DFM than the FA. Given that investment management is commoditised, I'd be interested to understand what value you are receiving for the annual five-figure sum.

Hi BI, do you mean in terms of annual return using the DFM or the activities the FA is providing to me? Or both?

Albermarle

Because_I_Can said:

dunstonh said:

I have a DFM arrangement in place currently, completely bespoke to me so VAT is charged which I understand is correct.

I just looked it up.  However, there are still differences of opinions in some areas but from what I can see.....  DFMs that are arranged without an intermediary (i.e. IFA / FA) are still VATable.   Where there is an intermediary, they are non-VATable.   

A second stage to that where there is a model portfolio and is using a fund style structure (so not bespoke), then they are exempt from VAT.  This was to allow a level playing field.   Bespoke portfolios are VATable.

On a side note, my FA charge was reduced to 0.35%.  I’m also exploring a potential move to an IFA at some point this year. 

That will likely become more common as the FCA is apparently preparing to run a review of adviser charging and what people are getting for their money.    Mainly on the back of the number of firms that are using DFMs nowadays and getting the client to pay for it on top of the IFA/FA charge that isn't reduced despite the adviser doing less work.

Thanks for your thoughts dunstonh.  And in terms of the DFM fee (on a portfolio of around £1.6m - 0.65% plus VAT of 0.13%),  does that rate sound reasonable for my type of arrangement and pot size?  

If you had a relationship just with an IFA , with no DFM involved , the typical ongoing charge for a pot of this size would be 0.5% . However that would be plus investment and platform charges 
If the 0.65% includes these charges , then it looks OK . In fact 1 % all in  including professional advice would be good.
However if investments and platform charges are extra, then the 0.65% is probably double what it should be .

dunstonh

Thanks for your thoughts dunstonh.  And in terms of the DFM fee (on a portfolio of around £1.6m - 0.65% plus VAT of 0.13%),  does that rate sound reasonable for my type of arrangement and pot size?  

Personally, I don't think DFMs add value unless you have specific investing needs. e.g. ESG.    

£1.6m is not a particularly large fund in IFA terms.   So, that is not a reason the IFA shouldn't be doing this on an advisory basis (which would avoid the VAT and the DFM charge).   Although advisory portfolios cost the IFA firm more and involve more work.  This is why many IFAs and FAs will use a DFM instead.

If you really have to use a DFM then there are plenty of options around the 0.2x% range and don't have VAT.   Do you have special investment requirements that need such a service?

Because_I_Can

Albermarle said:

Because_I_Can said:

dunstonh said:

I have a DFM arrangement in place currently, completely bespoke to me so VAT is charged which I understand is correct.

I just looked it up.  However, there are still differences of opinions in some areas but from what I can see.....  DFMs that are arranged without an intermediary (i.e. IFA / FA) are still VATable.   Where there is an intermediary, they are non-VATable.   

A second stage to that where there is a model portfolio and is using a fund style structure (so not bespoke), then they are exempt from VAT.  This was to allow a level playing field.   Bespoke portfolios are VATable.

On a side note, my FA charge was reduced to 0.35%.  I’m also exploring a potential move to an IFA at some point this year. 

That will likely become more common as the FCA is apparently preparing to run a review of adviser charging and what people are getting for their money.    Mainly on the back of the number of firms that are using DFMs nowadays and getting the client to pay for it on top of the IFA/FA charge that isn't reduced despite the adviser doing less work.

Thanks for your thoughts dunstonh.  And in terms of the DFM fee (on a portfolio of around £1.6m - 0.65% plus VAT of 0.13%),  does that rate sound reasonable for my type of arrangement and pot size?  

If you had a relationship just with an IFA , with no DFM involved , the typical ongoing charge for a pot of this size would be 0.5% . However that would be plus investment and platform charges 
If the 0.65% includes these charges , then it looks OK . In fact 1 % all in  including professional advice would be good.
However if investments and platform charges are extra, then the 0.65% is probably double what it should be .

Thanks Albermarle.  Excluding the FA charge, according to last years annual investment summary, the overall % figure is 1.3% (which covers DFM + VAT and all platform, dealing, currency, duty and fund charges). 

Because_I_Can

dunstonh said:

Thanks for your thoughts dunstonh.  And in terms of the DFM fee (on a portfolio of around £1.6m - 0.65% plus VAT of 0.13%),  does that rate sound reasonable for my type of arrangement and pot size?  

Personally, I don't think DFMs add value unless you have specific investing needs. e.g. ESG.    

£1.6m is not a particularly large fund in IFA terms.   So, that is not a reason the IFA shouldn't be doing this on an advisory basis (which would avoid the VAT and the DFM charge).   Although advisory portfolios cost the IFA firm more and involve more work.  This is why many IFAs and FAs will use a DFM instead.

If you really have to use a DFM then there are plenty of options around the 0.2x% range and don't have VAT.   Do you have special investment requirements that need such a service?

Thanks again.  No special investment requirements and my absolute preference would be for an IFA to run the whole pot on my behalf.  The FA I’m currently using is a nice guy who arranged the transfer out of my DB pension a couple of years ago.  His recommendation at the time (based on the size of the pot and the current market conditions - this was just as the markets were starting to recover during covid), was to put the investment management in the hands of a DFM.  Interesting that both the FA and DFM are under the Quilter Cheviot umbrella!  I have a catch up with them later in the month so plan to review performance and charges and I also plan to speak to an IFA in parallel ( a new firm have just opened up locally in Edinburgh - Rothesay Bennett). 

Albermarle

I think there is another difference between using an IFA and an IFA/DFM

If the IFA is doing the investing , they will run any proposed investment changes past you , before going ahead.
The DFM will not .

Of course if your circumstances change significantly , then objectives would be reviewed and new ones agreed for the DFM. 

Cus

For me, I don't pay for an IFA, just directly to the wealth manager. Seems that as it's also bespoke, I have to pay vat.  

If I didn't agree with the ideas and strategy of the specific person who is doing the investing for me (and who I meet) and if he wasn't performing better after fees than what I would do independently then it would make sense to find a much cheaper dfm or DIY.

Albermarle

Cus said:

For me, I don't pay for an IFA, just directly to the wealth manager. Seems that as it's also bespoke, I have to pay vat.  

If I didn't agree with the ideas and strategy of the specific person who is doing the investing for me (and who I meet) and if he wasn't performing better after fees than what I would do independently then it would make sense to find a much cheaper dfm or DIY.

That is probably a bit unusual for the average investor . They need the IFA to explain about tax relief and other basic issues as much as about the investing itself .