Advisers underestimating all in costs

Advisers are underestimating all-inclusive costs to clients by as much as 1% per year a new survey by Defaqto suggests.

Advisers underestimating all in costs


Commissioned by Santander, Defaqto polled 200 advisers from 90 different firms on the price paid and the value received from different products.

While there was broad agreement across the various advisers polled about expected fees, the firm said, when compared to Defaqto in-house data, the expectations were low, especially when the estimates included adviser fees.

“Given that the adviser fee is typically around 1% p.a., and a platform cost of around 0.3%, it would appear that most investment solutions are much underestimated in terms of cost by around 1% per year, of total cost.”


According to the report, in reality, all inclusive total costs to clients can be as much as 3% per year.
However, the firm added: “We should also highlight the DFM Model Portfolio and Bespoke DFM sectors are very fragmented and non-homogenous” which makes it difficult to compare like for like in this part of the market.

Another trend noticed by the survey is that around two thirds of adviser business now seems directed toward the use of multi-asset funds, either as unitised products or as platform-based model portfolios.

“These results compare against a similar survey Defaqto conducted in 2010, which indicates that advisers are slowly moving towards recommending their clients into outsourced, multi-asset solutions,” Defaqto said, evidenced by the graph on the left.

 “This result should be a reminder that advisers need to be unrestricted in their client suitability reports and recommendations,” the firm said. 

Another concerning result was the number of advisers still focusing on annual management charges and total expense ratios to work out the costs, in place of the ongoing charges figure.

Jason Baran, Insight Analyst (Investments) at Defaqto, said: “Clients may not be getting the full picture when it comes to cost. In particular, annual management charges (AMCs) underestimate the true cost of owning a fund by about half, so these clients will likely be surprised that future performance is reduced by unstated charges.

According to the report: “Approximately 90% of advisers claimed to know the difference between fees as measured by the AMC, TER or OCF. However, this contrasts with the response regarding how advisers compare costs, with approximately 10% of advisers using the AMC, 65% using TERs and only a minority of 25% using the most correct choice of OCFs.”




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