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Dennis Hall: Why we are reducing portfolios to just one fund

By Dennis Hall

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Aug 23, 2018
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Dennis HallIf you agree with the premise that funds with high charges generally underperform those with low charges, then you must also agree a portfolio that accrues high costs will generally underperform one with lower costs.

And if you accept this, the obvious conclusion is to hack away anything that increases that cost.

Switching from higher-priced active funds to lower-priced passive funds reduces costs at the fund level, but what about at the portfolio level?

This question has been nagging me for some time and, over summer, I vowed to do something about it.

I deal with portfolio cost issues by using a platform with the lowest costs for the service and functionality we need. Platform charges are between 12.5 and 15 basis points, which are competitive. But with our portfolios typically holding 12 or more funds, the costs of rebalancing soon mount up.

Could we deliver a better client outcome by only having one fund?

Our research is not quite complete but the early indications are that we could. And even if we cannot do it with one fund, it looks very doable with two, especially within Isa and Sipp tax wrappers.

This then raises other questions, such as “will my clients buy it?” and “does this threaten my business?” The latter really gets to the heart of what value clients think you bring to the table.

For the past decade or so, my conversations with clients have mostly been about financial planning needs rather than portfolio management. Knowing they are on track to achieve their plans is more important to them than the underlying asset allocation.

Yet would they really buy a single fund strategy, even if I could prove it would be better for them? It would be confronting the “all my eggs in one basket” argument and the strange and pervasive desire for humans to make things more complex than they need to be (complexity bias).

So, I asked the question among those clients with seven figure portfolios. I figured if I could convince them, I could convince my other clients. There was surprisingly little resistance, particularly as we could demonstrate efficiency gains leading to better performance and more simplicity in their lives.

Our investment proposition has always eschewed active or third-party discretionary fund managers, and our portfolios are mostly populated with Dimensional and Vanguard funds, so it was a relatively small step to mentally let go of a multi-fund portfolio and to embrace just one or two.

I anticipated it would be a tougher sell to my clients but we have already seen a few million pounds of new money go straight to single fund propositions without push back.

There will be transactional cost savings in relation to rebalancing and fewer hidden costs incurred depending on how the fund is being priced (toward true offer or true bid). It should also reduce the time spent on rebalancing activities, which should be reflected in lower adviser charges too.

Dennis Hall is managing director of Yellowtail Financial Planning

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1 Comments

Go to the profile of Arthur Childs, Chartered Financial Planner

Hello Dennis

It has been a long while since we met and I am delighted that your business is doing so well.  I understand your logic and I think you will need at least two funds to best manage the annual washing out of gains for CGT purposes.  We use the Nucleus wrap platform in the main and the quarterly rebalancing is carried out automatically and at not cost to us or the client.  We currently use Morningstar as a DFM for some clients so they carry out the rebalancing but at 0.36% including VAT it is too expensive for that service.  We are now owned by Flying Colours and as they have discretionary status we expect to be able to dispense with the fee to Morningstar shortly.

At the end of the day it is all about client relationships and their trust in us.  I am sure you will let us know how you get on with your journey towards the best outcome for clients.  Arthur