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  • Fees and charges: Answering the difficult questions
    From January 2018, wealth managers have to reveal on their annual statements all the underlying costs and charges of the products they recommend to clients. Although much talk centres on the importance of returns after fees, how will clients react when the portfolio bonnet is raised?

    Giving with one hand, taking with the other…
    At the recent PAM Annual CEO dinner, Andrew Hutton, Director AJ Hutton Ltd talked about the value between the alpha and the beta and how the managers justify the extra charges. So, on the basis that an investment manager runs two portfolios—one passive for 50 bps and one active for 100 bps—what return does the active portfolio have to produce to justify its extra costs?

    In that respect, I think that the value for money issue can be defined and quantified as Return, Risk and Reward.

    The three Rs
    Return: If the active portfolio delivers a better ex post return and providing the return totals more than the costs, then the client should be satisfied. Risk: Equally, if the market goes south and the IM’s low risk, low volatility strategy results in the portfolio retaining most of its value, then the client should again be reasonably satisfied. Rewards: If the active portfolio comes with a range of shiny and worthwhile extras, such as invitations to exclusive events, seminars or rewards, then there is the distinct possibility that the client might (just) verge on being… ‘pleased’?

    That is how managers can use the three Rs to justify extra charges.

    Wealth managers need tools that enable them to compare these different factors and to demonstrate that they are indeed delivering real value to clients.

    MIFID II—the hidden and unexpected benefits
    Now that the regulations have forced us to process all the cost and charging information we have some surprising benefits.

    By revealing all charges and fees instantly, JHC Figaro and JHC Neon can enable managers to extract instantly, review and analyse their total fees and costs and prepare themselves for their clients’ questions at year-end.

    Underlying portfolio costs, projected returns and relative volatility measures can all be displayed on dashboards.

    Using the same tools, Chief Investment Officers can compare the three Rs of different managers to ensure that all clients are being fairly treated.

    Disclosure of costs is just part of the MIFID II equation. Whilst that requirement may satisfy the regulator, the real benefit to clients is demonstrating that you have optimised performance by showing that you took the bottom line into account as well as the top line. Perhaps that information, with accompanying ex post returns, could be used to challenge the product providers?

    Planning
    Incorporating cost and fee details in a what-if tool, empowers managers to make informed decisions. Assuming both portfolios have a projected net return of 1%, but one achieves it by a 2% ex ante performance aligned with a 100bps charge and the other is hoping for a 1.5% return with a 50bps charge, then in reality, perhaps the less ambitious product is the better option?

    Providing managers with the information they need instantly not only accelerates and informs the decision-making process, it can also help deal with those clients who may be surprised (or worse) by what they see on their annual statement.

    John Blackman - Chief Executive Officer - JHC

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