Packaged fund returns hit by huge fees

The investment returns on “pre-packaged” portfolios sold by wealth managers could vary by as much as £46,000 (Dh284,296) over a decade on a £500,000 pension due to the wide range of fees charged, a report has revealed.

Research by investment platform Skandia based on data from The Lang Cat, an independent consultancy, shows the total cost of investing in these pre- packaged funds — also known as model portfolios — can have a substantial impact, knocking thousands of pounds off returns.

Model portfolios invest in a number of funds to target a level of returns and a degree of risk. Wealth managers may offer a number of such portfolios, often assigning them a risk rating to suit different types of investor.

Financial advisers, who are finding more of their time consumed by dealing with new regulations, are increasingly turning to model portfolios as “off- the-shelf” products that provide an efficient way to invest on behalf of their clients. However, many model portfolios have complex layers of charges that can materially erode investment returns over time.

The research looked at portfolios with a similar risk profile and asset allocation provided by five well-known wealth managers and offered through various platforms.

The total cost took into account the platform fee, a wealth manager’s charge for running the portfolio and the funds’ fees, as well as other expenses, such as the cost of rebalancing the portfolios and trading costs.

The research found that a pension of £500,000 over 10 years would grow to £721,000 if invested in the Brooks MacDonald Active fund on the Novia platform.

At the other end of the scale, this investment would be worth £767,000 if invested in the Skandia WealthSelect 5 fund on the Skandia platform — a difference in return of £46,000.

Other lower-cost portfolios include London and Capital 5 on the Aviva platform, with a total cost of 1.19 per cent. A £500,000 pension investment would be worth £757,000 after 10 years.

Similarly, the difference in returns for a £500,000 investment into an individual savings account over 10 years would be £42,000, due to charges ranging from 1.70 per cent a year to 1.10 per cent.

For example, buying the Brooks Macdonald Active fund through the Novia platform would cost 1.70 per cent a year. Conversely, both the London and Capital 5 and Wealth Select 5 funds, bought via the Ascentric and Aviva platforms respectively, had charges between 1.10 and 1.14 per cent.

A smaller investment of £75,000 into an Isa could see fees vary between 1.14 per cent and 1.75 per cent, resulting in a difference in returns of £7,000.

Mark Polson, principal at The Lang Cat, noted that Skandia’s range does not include a wealth manager’s charge for managing the portfolio.

“Most providers of model portfolios charge 0.25-0.50 per cent a year plus VAT for being invested in these products,” he said.

Justin Modray, founder of financial website Candid Money, said that in one case, an investor had £750,000 in a pension via a discretionary investment service. Charges were 1.20 per cent a year for the service, 0.98 per cent for underlying fund costs, 0.40 per cent for dealing fees — averaging around £1,000 a year and £216 for a pension — resulting in total annual costs of £17,566.

Many model portfolios also lack transparency, making it tough for investors to see which funds their money is invested in, the individual fund costs, and the amount apportioned to each fund.

Although such detail is arguably part of the intellectual capital offered by the wealth manager, which helps to justify the fee, many investors welcome the move towards a more transparent portfolio.

But further investigation reveals that many of these portfolios tend to invest in the same universe of funds.

Of the five discretionary fund managers analysed in the research, all used the Threadneedle UK Equity fund, while four invested in Artemis Income.

Other funds that frequently cropped up in portfolios include Newton Asian Income, Standard Life Global Absolute Return Strategies, Axa Framlington UK Select Opportunities, Fidelity Moneybuilder Income and First State Asian Pacific Leaders.

Gary Potter, a fund selector at F&C Asset Management, said many model portfolios hold the same large funds, seemingly based on a “rear-view mirror” approach of investing in those that have already performed well over the past few years.

Yet he points out that managers of large funds will find it harder to deliver top returns than those with fewer assets under management, as it is “tougher to steer a big ship”.

“It’s better to be investing in a fund manager when he is building his track record than one who is living off it,” said Potter.

The Financial Conduct Authority, the UK’s watchdog, has also warned that investors are at risk of being shoehorned into model portfolios not suited to their specific needs.

— Financial Times