I wrote last week that new entrants to the fund management market now appear to understand that they need to at least pretend to compete on price – as companies do in most other markets.
However, it turns out that not all the established players in the market are with the programme on this – particularly in the private client industry.
A reader has forwarded me a note to him from Killik and Co. It offers him the opportunity to have the company build him a “bespoke UK-listed equities portfolio.”
The nice people at the firm will gather together for him ten holdings with a”defensive growth bias” and with “strong long term growth prospects not reliant on sustained cyclical recovery.” They’ll also try and make sure that he gets a “minimum prospective dividend yield of 2%.” They’ll time their stock selections “as precisely as possible”, and even let him say if he doesn’t want them to buy any commodities or oil and gas for him. They’ll also write down their ideas “in depth” so giving him comfort that his stock holdings are “fully researched”.
That sounds like a lot of work for them. But I don’t suppose it really is – Killik is a stockbroker, so stock picking is what they are supposed to do anyway: any of the stocks they might shovel into your portfolio will already be part of what they call their “virtual portfolio of ideas”.
So what do you think Killik might charge you for this list of ten stocks? A management fee of 1%, perhaps, to cover the admin of opening a special account for Killik to put your shares in, the fact that you are getting a “tailored account” plus a contribution towards your broker’s bonus? Or maybe a little bit more because you are a private client and everyone in the business knows it makes sense to charge private clients extra. If so you’d be wrong.
They’ll be charging you 2% of the value of the portfolio every year, plus 10% of all returns over those made by the FTSE All Share Index (plus VAT). And they’ll also be charging you £50 per trade regardless of the size of the trade – rather than the £15 or so you’d pay at a discount broker. That’s a sum they consider to be “nominal”.
This is totally, absolutely, 100% outrageous. As a product it has few saving graces. As a charging structure it has absolutely none.
It doesn’t even pretend to be clever – no derivatives, no short selling, no shifting around asset classes. None of the stuff that allows hedge funds to get away with claiming (wrongly of course) that they can charge silly fees because they can do stuff other people can’t. And it doesn’t even invest abroad and therefore need complicated stuff such as bilingual analysts or aeroplane flights to be involved.
Instead, it is just a concentrated (and therefore risky) portfolio of long-only UK-listed stocks. For which they want to charge double the normal UK management fee, as well as a performance fee.
My views on performance fees (they are wrong, wrong, wrong) are here: The only kind of performance fee I wouldn’t mind. But I feel much the same about the 2%. It is rapaciously high. And it is totally out of whack with market trends.
Get the iShares FTSE UK Dividends Plus ETF instead. Or a good investment trust (Morningstar has just started rating them, which is helpful). Or really just about anything.