Are your clients truly getting value from their BR solution?

Matt Dickens, Ingenious

By Matt Dickens, Senior Business Development Director at Ingenious – Financial planners and wealth managers strive to deliver on the needs of their clients by always providing the most suitable and effective advice. But as with any service, this advice should also be delivered at the best possible value for the investor. Value can be simplistically defined as the service that delivers the most benefit, balanced against the financial cost, but in the estate planning space, how do you assess what good value is?
 

Total fees and charges
 
Product fees are guaranteed to negatively impact returns, so it is important to minimise their impact when looking to gain the best value from the investment. Some managers report little or no fees paid by the investor to the manager, but instead charge the company or investment service itself. While this might initially be seen as better value for the investor, it is not as simple as that. Investors in unlisted BR services become a shareholder of the portfolio companies, so the reality is that any fees paid by the companies are effectively being paid by the shareholder (or investor). Therefore, both investor fees and company fees will both negatively impact the final return and must be considered together.
 
Analysis of what a manager is paid by the investor and by the company over a significant period will enable an adviser to conclude if the manager is offering good value, or if a disproportionate amount of fees is going to the manager at the expense of their investors.
 
Real investment returns
 
Another key component of assessing value is what the investment actually delivers. For BR solutions, investors’ main objective is commonly to pass on the maximum sum possible to their beneficiaries upon death. This may lead to a conclusion that delivering Inheritance Tax relief at the lowest possible cost is the primary driver of value. However, especially for clients with longer time horizons, the one-dimensional goal of avoiding a potential 40 per cent Inheritance Tax bill can easily over-shadow the equally important goal of aiming to steadily grow the investment, preventing erosion by inflation, drawdowns and investment fees. Unlike some IHT-focused solutions, such as trusts or gifting, investors in BR services do not have to accept zero growth of their wealth from the point of investment.  Instead, investors can continue to earn returns, either taking an income stream or increasing the final sum to be passed onto their beneficiaries, precisely in line with their original objective. 
 
While most BR managers predict their ongoing returns at a certain level, those targets are not guaranteed and historic performance varies widely.
 
The relationship between fees and risk
 
Given that the majority of managers in the BR space state their performance targets net of fees, to produce positive growth and achieve their target return, those managers must first earn back any fees they are taking. Let’s take the below scenario to illustrate this point.
 
Manager 1
Annual performance target, net of fees: 3 per cent
Annual fees: 3 per cent
Gross performance target: 6 per cent
 
Manager 2
Annual performance target, net of fees: 4 per cent
Annual fees: 1 per cent
Gross performance target: 5 per cent
 
Initially, it might appear that Manager 2 must be taking more risk to target a higher net return of 4 per cent than Manager 1, who is targeting 3 per cent. However, Manager 1 has to deliver an additional 2 per cent of gross return than Manager 2, to make up for charging higher fees. Higher fees not only impact returns and value, but they can also mean greater risk.
 
Market comparison
 
In the Tax Efficient Review’s most recent analysis of Unlisted BR Services1, they released data that ranks services in the market in terms of both investor returns and total fees. IEP Private Real Estate achieved the top rank for returns delivered, with the second lowest total fees in the market, demonstrating that it represents attractive value for investors in comparison to other services.
 

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