How fair are DFM exit charges?

Lloyd Thomas-Darren-2013

Advisers have been warned to factor in the costs of discretionary fund manager exit charges following a study by Fundweb sister title Money Marketing highlighting big variations in charges levied to leave a DFM.

Administrative charges applied on transfers range from £15 per line of UK stock to £50 per line of overseas stock, with some DFMs refusing to reveal the charges to non-clients and four DFMs studied allowing transfers free of charge.

Advisers say these charges should form a vital part of due diligence before investing with a DFM and that transfer charges can amount to a significant cost.

Plutus Wealth Management independent financial planner James Robson says: “A DFM will usually have many more lines of stock than the average adviser would have in their own model portfolio. It is not uncommon to run investments across 20 lines of stock so this can come at a really high cost to a client if you want to transfer.”

Threesixty Services set up a DFM due diligence service in May in order to validate them for member firms’ use. Managing director Phil Young says advisers need to pay close scrutiny to any additional costs associated with a DFM.

He says: “Advisers should be asking about, considering and adding up all costs they expose their clients to when outsourcing to a DFM.

“Given the potential extra cost involved in using a DFM, which an adviser also generates income from, it is really incumbent on advisory businesses to do their analysis at that level of detail and beyond.”

Thomas and Thomas Financial Services managing director Darren Lloyd Thomas says DFMs are behind when it comes to charges and suggests certain fees are not in the spirit of the RDR. He says: “I think DFMs could give themselves the kiss of death because of these char­ges. We have found it very penal trying to move clients out, they seem to be behind the rest of the industry.”

Notably, GAM, Ingenious, London & Capital and 7IM do not impose any in-specie transfer charges. GAM investment director Charles Hepworth says: “The GAM DFM service provides investors with access to five risk-rated models which are structured as funds. Therefore, there are no exit fees associated with the service should an adviser wish to switch to another DFM service or if an investor wants to liquidate their assets.”

London & Capital managing director Richard Leigh says the firm’s arrangements with advisers prohibit it from imposing transfer charges. He says: “London & Capital charges no exit fees on the managed portfolios. None of the underlying funds our port­folios invest in charge an exit fee, which is a conscious decision on behalf of the team to keep costs as low as possible for our intermediaries.Our fee agreement does not allow us to charge an exit fee”.

Brooks Macdonald, Smith & Williamson and Vestra Wealth would not reveal their in-specie transfer charges. A Brooks Macdonald spokesman says: “I can confirm that Brooks Macdonald does apply exit charges but only where they transfer in specie. However, we do not disclose the amount to non-clients.”

A Vestra spokesman says: “We are not able to disclose the exact fees but they are in line with much of the industry.”

CWC Consulting senior partner Clive Waller says: “If you have got a lot of lines of stock with a DFM and you are going to be charged £25 per line of stock, it is almost not worthwhile transferring away because the charges are so high.”

Earlier in July, the regulator decided to allow referral payments to advisers from DFMs on pre-RDR business but it banned new payments related to DFM top-ups.

In February, the FSA sent trade bodies a briefing note setting out four options for legacy DFM referrals – switch off all referral payments following a transitional period; allow payments for pre-RDR referrals but ban them for post-RDR top-ups; allow referral payments to continue on original investments but turn them off following fund switches, echoing the position on trail commission; and allow payments for pre-RDR referrals but reduce the level of payments for post-RDR top-ups.

The FCA proposes taking up the second option. It had initially wanted payments to stop following fund switches but now says banning DFM payments on post-RDR top-ups is less complex.

The regulator also plans to extend the payments ban to advisers who continue to provide other services to clients referred to DFMs, such as providing the client with market research or passing information from DFM to client.

DFM transfer charges
DFM Charges
7IM None
Brewin £15 per UK line of stock £25 overseas stock £15 preparation fee
Brooks Macdonald Will not disclose
City AM £20 per line of stock £25 per Isa wrapper plus £5 per stock
GAM None
Ingenious None
London & Capital None
Octopus £50 per portfolio out as cash £100 per in-specie portfolio transfer
Quilter Cheviot £15 per UK line of stock £50 per overseas stock
Smith & Williamson Will not disclose
Vestra Will not disclose