Investment

Family offices – worried about hidden costs in your portfolios? This man wants to help you

ClearGlass, a UK service provider, is keen to hear from family offices who want to learn more about hidden costs incurred by their asset managers, on top of standard fees.

The technology-driven cost analysis service covers a growing array of traditional funds, as well as alternative portfolios, such as private equity and property.

It’s our understanding that family offices and charities are just as concerned by hidden costs as pension schemes. We are happy to help

It has been developed by chairman Chris Sier, a former policeman, whose battle to shine a light on costs incurred at UK pension schemes has lasted eleven years.

His campaign led to a series of bruising fights with managers whose bottom lines are flattered by the status quo. Sier achieved a breakthrough when he was appointed to advise the Financial Conduct Authority, the UK regulator, on how to achieve cost transparency in institutional asset management.

Elsewhere, he has won the backing of the UK Treasury for initiatives to develop fintech businesses in Northern England. He chairs AgeWage which uses technology to measure the costs, and potential, in personal pension plans.

Sier has won the plaudits of trade associations, and consultants, for the way he calculates costs by taking a granular approach to the data managers they now need to supply in Europe, under Mifid II standards.

Sier said: “We not only built a product, we had to define a market. It was always going to take time to achieve this.”

The impact costs make on portfolios can vary. An example of a simple product on the ClearGlass website, suggests explicit and implicit costs of 1.4% but complex products with high transaction costs could tot up to 3%, according to Sier.

At this stage, his estimate excludes adviser fees, as well as manager behaviour flaws which can, for example, lead to poorly-researched sales of stock which can produce portfolio losses of 0.94%, according to data supplier Inalytics.

Sier says: “It’s our understanding that family offices and charities are just as concerned by hidden costs as pension schemes. We are happy to help.”

Family offices contacted by Family Capital confirm their wariness of hidden charges, while also backing sectors like property, venture capital and private equity, whose underlying costs can be high.

ClearGlass uses disclosure templates required by the FCA to break down of cost data supplied by managers. It verifies each data set, asking clients to check with managers where it sees a false trail. A helpline has been set up for clients to contact the FCA, which is keen to know about repeated malpractice.  Sier says: “It’s surprising how often managers tinker with their template, so that things don’t add up.”

ClearGlass currently assesses mandates worth a total of £120 billion. Sier has also worked with the £300 billion local authority pension sector. He says ClearGlass has a potential pipeline of assets worth £2 trillion in Europe. Consultants who have supplied backing include Aon and Mercer. As ClearGlass’s database builds up, Sier expects to get a fuller sense of the quality of disclosures.

Clearglass charges pension schemes £100 for each portfolio review. Sier says he has yet to finalise a charging structure for family offices and charities, but wants his charging structure to reflect social need.

Sier’s chief executive is Ritesh Singhania, a 2015 MBA scholar at Said Business School, Oxford University. He was sponsored by the Skoll Foundation of California, led by Jeffrey Skoll, who developed eBay, the internet auction business. The foundation backs entrepreneurs making a contribution to society: ClearGlass would fall into this category.

Singhania has built e-commerce platforms and used to head up operations at Avani Bio Energy, indirectly backed by the Rockefeller family, a backer of plans to develop mini-electricity grids in India. Avani gathers pine needles on the foothills of the Himalayas into electricity and charcoal, reducing the risk of forest fire as a result.

The ClearGlass team, many of them based in India, puts together data on managers of listed portfolios, including administration and transaction costs. It provides data on profits made by stock lending. Actively traded smart beta and absolute return funds can suffer particularly high costs.

In the real estate sector, ClearGlass puts together costs incurred in the direct management of property and cash buffers, as well as standard fees. In private equity, it adds up administrative expenses, including those charged to portfolio companies, plus performance and base fees, collectively capable of making a dent in returns against stock market indices.

Over the years, asset managers have argued that net returns are struck after taking account of all the costs now analysed by Sier. They warn against double counting.

But Sier argues clients deserve to know precisely how their capital is being employed by managers. High, and hidden, costs may not look so bad in sectors enjoying a strong run.

But clients become aggrieved by hidden costs when performance turns down. Sier’s findings further suggest they need to reflect whether active managers can ever manage to outperform the indices, given the way their performance is handicapped by costs.

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