News
ACD - It will have you in tiers...
Thursday 18th January 2018
Ryan Johnson - Lloyd Expert Consultancy Ltd. Ryan is the leading expert across the industry for selecting, changing and managing an Authorised Corporate Director (ACD) for clients within the financial services.
After many years successfully representing firms selecting, changing and managing ACDs, within the market place, I am writing a number of articles on my experience and expert knowledge of the ACD industry, to help firms understand the market and hopefully improve the practices that ACDs currently employ.
The aim of this article is to create a debate and push the industry to provide a better, clearer understanding and driving up standards across the ACD industry, to ensure firms are getting more added value. I would like to build on the ACD market place reputation overall. ACDs aren't always listening to firms and through a lack of understanding firms aren't in a position to challenge, so during the course of my articles I am hoping to provide an insight and food for thought. An ACD can no longer be seen as a letter box but as I say to all firms I work with it is the most important and serious partnership decision that a firm can make, firms are ultimately handing there client bank over to an ACD.
I start by assessing the many fee structures that ACDs use as it is the most relevant and often the starting point for many clients who initially engage with me and that I have represented to understand the ACD market place.
Having worked with all ACDs in the market place I often question each one of them when representing a firm why the need to tier fees, when minimums are also imposed to cover the running costs for a book of business?
I ask this question as many fund and wealth managers are under pressure from the FCA to make charging of fees clear and transparent for clients. Yet when most of the firms I initially work with outline the ACDs bespoke, yes bespoke, tiering for the Asset Under Management (AUM) under the firms control or predicted fund growth. Firms often aren't aware the tiring is bespoke as it is rarely consistent, yet more made for the firm based on the AUM.
Now if an ACD wasn't to charge a minimum fee for the running of funds then I can kind of understand the rationale for the tiring of fees but for many firms this is confusing and unclear. In an industry where firms are working hard to ensure the TER / AMC / OCF is made more clear the tiring of fees make the job that bit harder and misleading. In addition the varying rate of the fees depending on the AUM can create further confusion as investments go up as well as down, inflows and outflows.
Otherwise with minimum fees I ask myself why do ACDs create a tiring? I conclude it must be to encourage clients to grow the AUM in order to achieve a lower rate. However every firm I work with generally wants to grow AUM by the strategy in place and are not driven by the fact an ACD is offering a lower bps charge to reach a limit. The reality is very different when working with firms and often I find firms relieved, thanking me, for removing the tiring, making it clearer exactly what the charges are and how they relate to the OCF.
After all this criticism, do I think there is a space for tiring? I actually do, but would stop at 2 tiers at most, then if a client reaches above the two tier limit sit down and renegotiate new tiring if appropriate, as if the funds grow beyond tiring, so does the revenue for the Fund Manager and ACD. Some ACDs I have seen are using 4 to 6 tiers which is not only excessive but confusing and difficult to calculate for firms.
Typical Illustration example 1
3 Funds, OEIC (UCIT)
Fund 1 - £194m
Fund 2 - £181m
Fund 3 - £264m
Minimum fund charge per year £60,000
First £100m - Tier 1 - 20bps
Next £200m - Tier 2 - 17bps
Next £300m - Tier 3 - 13bps
Thereafter - Tier 4 - 10bps
Typical Illustration example 2
3 Funds, OEIC (UCIT)
Fund 1 - £43m
Fund 2 - £107m
Fund 3 - £75m
Minimum fund charge per year £45,000
First £50m - Tier 1 - 18bps
Next £150m - Tier 2 - 17bps
Next £100m - Tier 3 - 15bps
Thereafter - Tier 4 - 12bps
Now I ask you to calculate what the charges for the fund are in relation to the ACD tiered table above? Now turn that into how much that is in monetary value? Are the minimums relevant and do they actually push up the overall bps charge?
A couple of other questions when comparing 'apples with apples' what do these charges include if you are presented with similar tables from different ACDs? What else is required for a fund that may not be outlined?
CONFUSING?
This is often what firms are faced with when working with ACDs and I am pleading with the industry to please stop this practice as all firms I work with and have worked for don't like it, don't appreciate it and find it annoying, especially when the industry is driven by the demands of the regulator to make client charges clear and transparent, let's not talk about MiFID II in this article...
Firms are often working hard to ensure there fund remains competitive and below the magic 2% OCF charge so it is important that if a tiering is to be used it is limited to 2 tiers at most or targeted minimums. Firms would rather have an overall lower bps charge to start with in order to recognise and appreciate the hard work they have gone to for the AUM.
For any firm reading this I would encourage you to assess your current IMA / sponsorship agreement (schedule) and get in touch with me for more understanding...
In my next article I will be discussing why clients face a tough choice when selecting an ACD, exit fees, the myths on the process for transferring and the real cost of transfer.
I believe exploring the options of an ACD should be common practice for clients and done at the end of each contract like an energy supplier but not as difficult to understand... Only by doing this do I believe the ACD industry will get better and clients will be better off.