The formula adds together administration expenses, the cost of market access and the cost of applied research to work out if the manager’s cost is reasonable against the service client’s receive.
It follows the recent publication of the FCA’s Asset Management Market Study which found a negative relationship between net returns and charges and said it should be easier for investors to understand the full cost of their portfolios.
ARC insists the formula is not about ensuring the fee is low, saying “a fair fee is not the same as a low fee”.
In the report, ARC said: “The ARC Fair Fee Formula allows each investor to assess whether they are receiving value for money from their DFM by unbundling the service elements being provided.
“Research costs money but brings opportunity. A fair fee is one that delivers value for money, where each DFM is paid a fair price for providing investment administration services, financial market access and for applying their investment knowledge and skills to enhancing an investor’s wealth.”
By breaking down the costs into admin, market access and research, ARC said clients can assess whether the fees are fair and reasonable and not only simply see the performance of their portfolio net of fees and costs.
It added administration expenses, including suitability assessments, provisions of statements and client correspondence, are likely to range from £2,000 to £10,000 a year.
The cost of market access – thought of as the underlying cost of accessing a given market by tracking a dedicated index – can be used to compare against industry norms, the ARC said.
The skill of the manager and the cost attached to it is wrapped up in the cost of applied research, which should be zero for a passive portfolio but can also lead to high outperformance if successful.
