Hi Dave, good of you to bring this up. Fees are one of the most contentious parts of the industry. Let me explain how we set this amount and my views on the subject as a whole.
Our biggest priority when designing the service was for the compensation model to maintain alignment of interests between WealthSmart and its customers. Our win-win charging alongside feedback from our target market led us to design the smart portfolio concept (an automatic portfolio that firsts seeks to preserve capital, then to grow it). The combination of both, win-win fees and risk-adaptive portfolios, had a significant downward pressure on the profitability of the business model as a whole. We set the fees at a level that made the whole service viable. We’ve also modeled the effect of our fee on our customers’ short/medium/long-term performances. This has led us to set a threshold above just being profitable before charging, to make sure it doesn’t penalise early stage portfolios weighted towards lower-risk/return products (ie. we let give customers a running head start in profitability before charging). The specifics of how we do this are still being fine-tuned. Once we settle on the parameters, I will write a blog post on the subject as a whole
Another trend we question is the rise of passive funds and a race to the bottom for investment fees (vanguard’s robot proposition in the US charges a meer 30bp). I think there’s a concern here of the commodification of services that benefit greatly from experience and reflection. During my days as a market-maker in fixed income ETFs, I witnessed first hands the wild swings in liquidity of high-yield bonds. On some occasions, the ETF would trade 2% under its nominal value (the total value of the underlying constituents). Despite this, people were still selling it unaware of the 2% surcharge they were incurring indirectly. The passive high-yield ETFs funds were designed to be cheap and simple replication strategies, and the side effect was a failure to address the major liquidity issues of certain bond issues during volatile times. Meanwhile, some (not all…) actively managed funds were far better at mitigating this effect by changing the makeup of their funds inline with volatility. Those active funds charged nearly double what the passives charged, but too me the value for money was justified as the difference in fees was much lower than the 2% in this scenario. They leveraged their experience of a niche market to protect their investors from these temporary liquidity holes. We carry this ethos with us at WealthSmart. Our whole purpose is to deliver value for money to our end customers, by leveraging our experience and a flexible investment mandate.