A prospective client recently asked us to investigate the “true” cost of a discretionary manager’s portfolio.

I will not mention the company in question; but it is safe to say they are in the UK’s top 10 of discretionary fund managers for public awareness.

I contacted them with a genuine level of curiosity and requested a sample portfolio for a client with a substantial amount to invest. The risk profile was cautious which they translated as approximately 40% equities. I will not comment on the content of the portfolio otherwise I’ll be clambering on a heap of soap boxes berating the use of private equity, hedge funds and structured products for a “cautious” client.

My focus is on their charges and their inability to divulge the true cost to me and to the client.  They publicise their charges as 1% (+VAT) per annum on the 1^st £million and then 0.5% (+VAT) per annum thereafter. “Simples” as the meerkat would say. And this is the truth but not the whole truth. The truth is the client pays much more.

The charging structure resembles that of an onion with many hidden layers hidden.

I believe it is worthwhile me explaining the basic portfolio to drill further into their skulduggery.

The portfolio consisted of funds of funds equities, fixed interest, private equity, hedge funds and structured products; most of which were not managed by them. It stands to reason that these third party managers are going to be paid for their efforts, but their fees are not reflected in the client facing document that is produced.

I enquired further….

My line of enquiry related to the other managers and how they get paid. This was rebuffed with a cursory: “it’s all wrapped up in our fee”.

Smelling a rat I enquired further by picking just one fund from the portfolio that I knew had a charge of 1.8% pa charge. I asked how this particular manager got their 1.8% pa when the discretionary manager was only charging circa 1%.

The answer came back faster than a boomerang in a hurricane.

Them: “Ah well you see, we access only institutional funds for our clients.”

Me: “Oh that is great but that is an institutional fund and that charge is in the public domain.”

Whoops! Found out!

Now that the stakes were rising and the discretionary manager had been found to be in error; they decided to regroup and promised to come back with more accurate information.

This information duly arrived 5 days later after several prompts, reminders and general cajoling. In the meantime, in the true spirit of Blue Peter’s, “here’s one I made earlier”, I had already calculated the portfolio charge.  If you have the right databases, the majority of the information is readily available on most funds held in their portfolio. It took me about an hour! I could be accused of wasting their time but this is research in the name of fairness.

Progress was definitely being made if not a little slow and extremely painful. They now agreed that there was a cost for the underlying portfolio managers and this was 1.65% per annum.

 But this 1.65% pa declaration came with a caveat:

Them: “this charge comes from the gross yield of the portfolio so the client doesn’t pay that fee at all.”

If I previously smelt a rat, we have graduated to a Biblical scale of foul smelliness.

“What?” I enquire.

Them: “Well you see if the yield (income on a fund) is 4.5% pa and the manager’s fee is 1.5% pa he takes it from the 4.5% so your client gets 3%.”

Me:”Ah, so the client gets a lower yield from the portfolio and therefore ultimately a lower return”

Them: “Yes”

 Me: “And that isn’t a charge?”

Them: “Well of course it is a charge but not on the growth”

Me: “But that is a charge?”

Them: “Yes”

Result! Halleluiah!

Now for those who have not lost the will to live the answer to the quest is as follows:

Their charge: 1.175% (including VAT)

Portfolio charges: 1.65%

Total: 2.825%

This total charge is not shown in any documentation that the client would see. The client would be perfectly in their right to take umbrage with this lack of disclosure and blatant fudging of the truth.

According to their beautifully produced literature they declare to have a “Clear charging structure”.  They do but they conveniently choose not to mention everyone else in the picture.

The sad fact is they are not alone in this practice of deception as this is standard practice from the discretionary management and private bank stable. What is even sadder and truly perplexing is that people still believe it is worth paying over 5x that of a highly diversified global portfolio using institutional funds in belief that these guys know something the rest of the world do not.

One thing we do know is they are well versed in the practice of deception.