DFM disruption
So that’s two out of three. My third this month is a really interesting move from discretionary fund management (DFM) stalwart Brewin Dolphin, which has overhauled its managed portfolio service that it offers through lots of platforms.
To cut a long story short, most of these models use standard retail funds in a model structure, which the DFM keeps control of and rebalances periodically .
What Brewin has done is to move to a sub-advised or segregated mandate structure for its portfolios.
In case you’re nodding sagely and thinking ‘what?’, the upshot is that it now uses a combination of four of its own funds to create about 60 per cent of the content of its portfolios. The constituents of those funds are – keep up at the back – the fund managers that used to be in the portfolios anyway. The deal is that by not using the retail fund and by bulking up trades across all the different platforms into these funds, Brewin can achieve a lower cost for investors. The remaining 40 per cent keeps doing what it was doing.
The cost of running the funds isn’t high – 0.05 per cent to the authorised corporate director, Maitland – and Brewin says this is more than compensated for by the reduction in ongoing charges figures it has managed to negotiate. For example, the balanced portfolio moves from 0.62 per cent (ex transaction fees and Brewin’s own 0.3 per cent plus VAT fee) to 0.52 per cent (after Maitland’s costs) in the new structure.
I’ve had a bit of time to get used to this now, and I don’t mind saying that I had an eyebrow raised at first. Basically, what you’re seeing here is the way that insured funds have been run since time immemorial. The provider buys in the funds at an institutional rate, ships it out the door at a retail rate, and pockets the difference, in what I like to call the 30-75-45 model. This stands for ‘buy it in at 30bps, sell it on at 75bps, and have a lunchtime bottle of wine at 45 quid’, in case you were wondering.
But what Brewin is doing here is a little different. It swears blind that it isn’t taking a clip on the funds – that is to say, investors pay what the fund costs the firm and no more than that. Brewin makes its money from its 30bps charge, same as normal – and, for what it’s worth, I think that 30bps is going to be under big pressure soon from AJ Bell and Tatton’s offerings in particular.
The other compromise that these structures bring is transparency. You can examine a model, but you can’t always dig inside a fund made up of sub-advised mandates so easily. To be fair to Brewin, it’s committed to showing the exact make up of the funds and who’s managing what. If it keeps both these promises, then this is potentially quite a good move.
