Discretionary Managed Funds versus Indivually Managed Funds

SOURDEVAL

I need advice please.

I have a SIPP worth 200k with Novia Global with a portfolio of 8 individually managed funds. All of which is managed by my IFA. He believes I would be better transferring these to a DFM. His reasons are:

He believes I would see higher returns

The charges would be the same.

My feeling is he is being lazy. What will his role be?

Albermarle

Investing a portfolio is only one part of an IFA's work. They will know your overall financial position, your objectives and your risk tolerance, so they can give appropriate guidance to the DFM as to the type of portfolio that would be suitable for you. Also the IFA can advice you on taxation, changes in legislation, inheritance issues, family finances etc. and when it comes to it, a suitable withdrawal strategy.

I think one difference with a DFM, is that they can make changes without running them by you first. Usually an IFA would check with you before making changes. Difficult to say whether that is a good or bad point.

I would hope that the IFA would reduce their charge to compensate for the DFM charge, but this does not seem that common, maybe unsurprisingly. On the other hand I think DFM charges have reduced, and are not that significant.

dunstonh

My feeling is he is being lazy. What will his role be?

I am no fan of DFMs but I do like DFM MPS. Which is it that your IFA is recommending?

The IFA remains liable for ongoing suitability on a DFM MPS and must carry out due diligence on the DFM and the underlying funds that they use. So, exactly the same as an advisory MPS.

Not all DFM MPS are created equal. Some IFAs will still run their portfolios but use the DFM's discretionary and regulatory permissions to perform activities for which the IFA is not authorised to do. So, your IFA is not being lazy. The IFA couldn't do that bit before, and they are not doing it in future. The discretionary capability allows them to have all clients on the same portfolio snapshot simultaneously. Whereas an advisory portfolio will be at irregular points (typically following reviews). So, if the snapshot changes in April but you are not seen until October, then your portfolio would not be changed until October if you were on advisory.

The charges would be the same.

The use of a discretionary MPS brings added cost, but a number of the platforms offer improved terms for IFAs using MPS, and that often covers the cost difference. Plus, it often gives you access to institutional class funds, which lowers the fund charges.

For example, I moved someone from advisory to discretionary MPS yesterday. The platform charge has been reduced from 0.145% to 0.068%. The OCF reduced from 0.11% to 0.07%. My charge at 0.50% remained unchanged. The DFM charge is 0.09%. So, a small cost saving but only small. The DFM MPS had virtually the same asset makeup and the comparison between advisory and discretionary was minimal over the years. So, in this case, it was a small cost saving for the client as well as a cleaner set up.

There is time saving for the IFA on transaction keying, which knocks off a few minutes per client, but the same due diligence and suitability checks are being run. So, no change there.

Perhaps your main issue is that you do not appear to value your IFA. So, maybe you should end the relationship. IFAs don't want clients who do not value their service. Most IFAs have capacity issues. So, getting rid of a client who doesn't like or want them is an easy win for both of you.

Bostonerimus1

How many layers of middle men does it take to screw in a light bulb manage your money? This sort of arrangement is how fees and expenses grow. It might not happen initially, but watch out for creep. If you have a problem with your IFA's advice then perhaps it's time to part company.

dunstonh

How many layers of middle men does it take 

to screw in a light bulb

 manage your money?

Jack of all trades - master of none

This sort of arrangement is how fees and expenses grow. It might not happen initially, but watch out for creep. If you have a problem with your IFA's advice then perhaps it's time to part company.

If you are against DFM MPS then that means you are against multi-asset funds, such as VLS or HSBC GS.

Bostonerimus1

https://forums.moneysavingexpert.com/discussion/comment/81868563#Comment_81868563

OP never mentions MPS and neither did I. For any fund that you buy you are giving someone the permission to buy something on your behalf be it a tracker, Fundsmith or VLS60. I'm just cynical about putting layers of people and fees between the investor and the funds.

Cus

If your overall total fees don't go up, and you have a discretionary wealth manager (wide range of definitions of what that is here) rather than an IFA choosing your investments then probably you have more of a chance of market beating returns, purely based on market intelligence and experience, but don't rely on it.

dunstonh

https://forums.moneysavingexpert.com/discussion/comment/81869113#Comment_81869113

The OP hasn't returned, but I suspect it is an MPS, as a full DFM would be damned expensive. The OP states the charges are the same, which leans towards an MPS.

There must be a layer between the investor and the funds in most cases, as the vast majority of consumers lack the knowledge or ability to build a portfolio.

Bostonerimus1

https://forums.moneysavingexpert.com/discussion/comment/81870588#Comment_81870588

I would like to see the management layers as lean as possible, but that's obviously going to vary depending on the individual. For a "fund of funds" like VLSxx bought directly by the investor there's two levels; the VLS team and then the teams running the underlying funds. The investor will pay a small premium over owning the funds directly. It's an ongoing sadness to me that many people feel intimidated by their personal finances and don't follw a few simple rules and invest in a simple index fund portfolio held in tax advantaged accounts. I basically just wish more people would follow the advice of Mr. Micawber and Jack Bogle.

dunstonh

 For a "fund of funds" like VLSxx bought directly by the investor there's two levels; the VLS team and then the teams running the underlying funds. 

Which is the same as a DFM MPS. Which is not surprising as the "fund of funds" is a DFM MPS within a fund.

With VLS, it's virtually the same outcome whether it's OEIC or MPS, bar some minor differences. The OEIC version rebalances through inflows and outflows. The MPS version rebalances quarterly using software. The charges are the same

It's an ongoing sadness to me that many people feel intimidated by their personal finances and don't follw a few simple rules and invest in a simple index fund portfolio held in tax advantaged accounts. I basically just wish more people would follow the advice of Mr. Micawber and Jack Bogle.

The index vs managed debate isn't applicable here. We are talking about the structure of the holdings. So, Jack Bogle's views are not an issue if it's an MPS within an OEIC or an MPS directly.