News came recently that Brewin Dolphin has reduced the cost of its Managed Portfolio Service (MPS), saving advisers’ clients an estimated GBP3 million a year.
The firm, which manages GBP10.4 billion on behalf of advisers and their underlying clients, has made the change to benefit those clients using the MPS. Some 1,000 advisers have GBP2.5 billion invested through this solution, only available on wealth platforms in the UK.
Guy Foster, head of research at Brewin Dolphin explains that as their business has grown, Brewin Dolphin realised it was investing in the same kind of funds any client could through platforms.
“As our scale grew we realised we ought to be able to achieve cheaper units from those funds but they reach a sort of ceiling where fund groups are not prepared to lower their cost because they are distributed through all of the platforms so anyone could access them.
“So, in order to get further economies of scale we have employed a manager of managers approach,” Foster explains.
Now, for part of its business, the firm selects key asset classes so that whereas in the past they might have offered a client four equity income funds, now one is available but with four underlying managers within it. Whereas before they were using the firm’s retail funds, now they are investing with the underlying managers through segregated mandates.
“It’s the same service but we can do it at a lower cost in recognition of the business we are giving them,” Foster says. “That reduction in the headline ongoing investment management cost is the most tangible of all the benefits.”
There are other routes to achieving economies of scale, Foster explains, including the fund of fund route.
“We decided not to use the fund of fund route. But if you did, you could take a rebate, you don’t need the same scale we have, and it’s not so complicated to administer, but we felt that we could get it cheaper still by using our manager of managers’ approach. We won’t have two sets of fund administration costs and there are other advantages we’ll have in terms of transactional costs as a result. Another advantage of the manager of manager route is that no one else can sell our assets if there is a run on funds.”
Foster says: “We only have to worry if our own driving is good not everybody else’s. Another challenge in running a funds business is that managers can leave and often investors might follow him or her to new shop and in that instance you will have to have sold the entire position only to reinvest with the same person at the new investment house.
“With the manager of managers structure you don’t have to sell the position -you can recontract with the fund group so there are no unnecessary transactions.”
An MPS type service cannot hold a closed fund but using the manager of managers’ route, Foster says they can retain the asset if a popular fund manager closes to new investment.
The process of switching to manager of managers has been complex in terms of administration and taken a significant initial investment. “The only drawback is that it is complicated to set up, but once up and running it should be simple to administer.
“One of the reasons why we waited to do this was to make sure we had enough assets to do it and if there were an upset in the market it would still be a viable project and delivering savings to clients and GBP2 billion was the figure where we could do it,” Foster explains.
“It’s all about the clients,” he says. “How can we create savings and pass them on to the clients in the most transparent and mechanical way?”
Reflecting on the sharp market drops at the beginning of February, Foster says clients want safety in their portfolios.
“Ultimately, the advisers appoint us as a safe pair of hands to look after their client’s assets with good risk management. When you have a setback like last week, you want firms who have not been getting out performance by running very aggressive strategies.”
People are more cost conscious with their investments too, he believes, and the firm launched a quasi-passive range last year which has GBP100 million under management and is aimed at people who are more cost averse. This is based on tracker funds at the moment as, in his experience, platforms can’t host a great deal of ETF business at the moment.
Buying ETFs is a different transaction from buying units in a fund, clearly, but Foster explains that fractions of units are also a problem. “There is also the issue that with a fund if the unit price is GBP100 and the client only wants GBP50 you can buy half a unit while with an ETF you have to buy the whole unit. So, you can end up with some small clients if you have to trade in things where you can’t buy a fraction of a unit the portfolio gets distorted.
“But those problems will be solved in the future as some platforms have solutions for it. Wealth platforms in general have it within their gift to come up with a solution.”
Looking forward, Foster predicts that the success of the MPS platform for Brewin Dolphin and for other firms seems set to continue. “Other firms with big services may be looking at ways to improve the value in the future just as we have,” he says.
“We have more options now that we have this platform and we continue to consider the best way we can to service the clients’ segments that we have.”