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Discretionary fund managers are failing to disclose details of their fees and holdings which ought to be crucial to financial advisers’ decision-making, according to a new report.

Discretionary portfolios, in which managers handle client money on investors’ behalf — including rebalancing portfolios and making asset allocation decisions — should face the same transparency requirements as mutual funds, according to research by the consultancy The Lang Cat.

Advisers have increasingly recommended the use of discretionary portfolios to clients since the market reforms introduced with the Retail Distribution Review (RDR) in 2013, which encouraged advisers to focus on financial planning rather than the details of investment strategy. The Lang Cat tried to establish whether advisers were generally choosing suitable products in this area for clients.

“We found an almost total lack of rational behaviour on the part of a number of adviser respondents, and systemic issues on the supply side,” said Mark Polson, principal at The Lang Cat.

Nearly half of advisers who recommend discretionary products told The Lang Cat that it was “quite hard” or “very hard” to establish total costs. When The Lang Cat attempted to research this it was able to find so-called total expense ratio (TER) figures for some discretionary managers, but none of the more inclusive ongoing charge (OCF) figures which are now the norm for mutual funds in the UK. Campaigners have criticised even the OCF as not reflecting the full costs of investing.

“I’ve heard the regulator stand up at conferences and say ‘If you do not understand what you are using and how it compares to other products, you should not use it,’” said Mr Polson. “We concluded that advisers’ choices cannot be properly data-driven, which they should be.”

The Lang Cat said that a full comparison of different discretionary portfolios was “nigh on impossible” but estimated average total annual charges at 2.08 per cent in its report, “Never Mind The Quality, Feel The Width”, which was carried out with CWC Research. Other estimates have placed this higher, including a survey by Numis, which suggested some clients might be paying up to 7 per cent.

Advisers allocate an average of 19 per cent of their clients’ holdings to discretionary solutions, with some allocating up to 90 per cent, The Lang Cat said. While some of these solutions may offer genuine value, Mr Polson said, other discretionary managers market themselves with “wood-panelled offices” and vague promises of investment “special sauce”.

Wealth managers, who run portfolios directly for their own clients but may also offer products to external advisers, say they already disclose most charges in percentage form on “rate cards” to new clients. New European requirements under the second version of the Markets in Financial Instruments Directive (Mifid II) are likely to require disclosure of all costs and charges by discretionary managers from the start of 2017, but companies in this field say that aggregating this information could result in substantial new costs for them.

“The problem for us is getting the information,” said John Barrass, deputy chief executive of the Wealth Management Association. He added that competition in his sector — the WMA has some 120 members — helps to keep costs down.

Nick Hungerford, founder of the online wealth manager Nutmeg, said he had spoken to new clients who were unaware they had been charged trading costs by their former wealth manager, although it is standard practice to use client money to pay for the costs of trading. He said that companies failing to disclose these costs were “stuck in the 19th century”.

The Lang Cat said the lack of cost disclosure goes in tandem with other problems, such as a lack of holdings information and questions over performance. The consultancy looked at a sample of discretionary portfolios over rolling three-year periods and found that no more than 11 per cent outperformed the FTSE All-Share index at any point, while none outperformed the FTSE 250.

Risk-rated solutions, which are classified according to volatility, have also grown in popularity since RDR, but The Lang Cat raised questions over whether these deliver value for money. It found that portfolios designed to take more risk than average in order to generate higher returns actually failed to outperform the FTSE 100 index.

“Volatility control is available and it does work but the costs in terms of performance and fees are incredible,” said Mr Polson.

The Lang Cat and CWC spoke to 45 companies including 38 advice firms and used data from leading discretionary providers via FE Analytics.

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