Mind those fees

Much has been said and written about the importance of taking fees into account when constructing clients' portfolios, but how exactly do you do so? David Crosoer, Investment Consultant Specialist at Glacier Research, says there are a few crucial boxes the financial intermediary needs to tick before going on the quote.

For many financial intermediaries comparing quotations from rival LISPs, and selecting the one that appears to be the cheapest is how far it goes. But is this adequate?

The most important area the financial intermediary needs to check is the range of funds that the LISP offers. Certain LISPs might appear to have inexpensive administration fees, but have a very restricted and expensive set of unit trust funds. Unit trust funds can be expensive because of the class the LISP offers (the retail or A- class is the most expensive, bargain-hunters look out for the B or R class), or because the particular fund has an above average management fee (funds with performance fees can be expensive, even if they return their benchmark).

Reduced management fees

LISPs often offer a focused range of funds in addition to an 'open' platform range. The management fee on these funds can often be obtained at a substantial discount to the A-class funds, either because the LISP pays the rebate of the A-class fund back to the investor, as in the case of Allan Gray and Momentum Core, or offers a cheaper institutional class to the investor.

In the case of Glacier Fusion, Investec Fund Select and Momentum Essential, investors are offered an all-in-fee class, usually denominated with a C behind the name, that includes a discounted fund management fee, an administration fee plus a broker fee. There can be substantial tax savings utilising such a fund class for a discretionary investor. In the case of Fusion the client will also receive an administration loyalty bonus on the calendar anniversary of the plan based on the assets he has in Fusion.

Admin fees

Financial intermediaries should also check whether the LISP charges a flat annual administration fee or an administration fee based on a sliding scale. A flat fee usually will benefit smaller investors at the expense of larger investors, since the larger investors are subsidising the smaller investors. But a flat fee can even be harmful to a smaller investor if he invests with the platform for an extended period of time. An investment that doubles every seven years, i.e. a 10% annual return, will substantially benefit from a sliding scale rather than a fixed scale as over time the investor will find his average annual fee decreasing.

In-house solution funds

Finally, don't ignore in-house solution funds on LISPs. These can offer cost-effective risk profiled solutions that give you access to top-class fund managers. But shop around, and find out about the Total Expense Ratio of the fund - this will drill down and take the cost of all the underlying funds into account.

There are substantial ways of adding value to the client from a fee-minimising perspective that go much further than simply comparing unstandardised quotes across LISPs. Intermediaries that take a holistic view of their portfolios will have a substantial advantage over those that are still selling portfolios on the basis of past performance.