“Multiple” layers of fees and the foundations of nonsense

In most professions, you will find some non-sensical ideas that take hold for longer than one might expect.


Eventually, a bit of logic, scepticism and common sense usually gives the Darwinian process a gentle push. For example, just the other day I read an article – more literate than numerate – about how the bucket approach to investing addresses sequencing risk. Yep, I am throwing the bait out there for a different day…

When ideas are wrong-headed, but through repetition get accepted as axiomatic anyway, you either have a paucity of understanding or some interest in maintaining the conventional (non)wisdom. Pseudo-logic drives a lot of human belief everywhere – why should financial services be immune?

Debunking the “extra layers of fees” myth

There is seldom discussion around Discretionary Fund Managers (DFMs) which in itself is a descriptor laced with contradictions, that doesn’t get mired in “extra layer of fees” commentary. Like Donald Trump and Covid vaccines, it can be a polarising debate depending on whether you see value in DFM services or not. Unfortunately, the debate is flawed even as one gets into the real questions like, “What are you getting for the money?”, “Is it worth it?” and “Who should be paying?”

That the “extra layer” is accepted as self-evident is where the problem starts. The confusion comes from mixing up layers of services and the layers of entities that provide them. We are so deeply steeped in the legacy of multiple services being bundled together by a single provider into a single fee, that we sometimes forget that we are paying for multiple services from that provider, performed by different teams and divisions, requiring different types of expertise.

This common practice of counting layers of providers in the food chain paints a picture of multiple snouts in the trough and displaces important questions, such as, which role-player is best suited to providing what service, how much does each service cost, and what does it all add up to? It sounds obvious – and it should. But there are some who are entirely comfortable that one entity implicitly provides five services for 1%, while being outraged that there are four specialist parties to a “food chain” whose fees add up to 1%.

Consider the logic of services offered “for free”. Let’s see. You have smart executives employing whole divisions of expensive people, who perform key services for no consideration? Think about that. The company is either being run by fools or is based on the reasonable expectation that people are easily hoodwinked – that the same fee is somehow acceptable if it is concealed and embedded in a different service, insulting as that is to advisers. People don’t perform services for free – it is time to move on from these archaic fictions. Why not just associate the correct fee with the correct service and let the consumer decide whether it is worth paying for? Not doing that simply makes things harder to compare, which in certain instances is the whole point.

What we should be asking

    • What services do I need?
    • Which entities provide the service?
    • Who is earning the fee?
    • Is there value in the service that exceeds the fee?
    • Can specialists provide more value than a generalist in performing this service?
    • What do all the fees add up to?
    • Do I have the information to compare propositions?
Brandon Zietsman, CEO and CIO, PortfolioMetrix

Not all fees are made equal

Some fees we pay begrudgingly. We acknowledge we have to pay them, and we pay with a grimace. There are other fees we pay because we desire the utility and consider it worthwhile. We pay with a smile. There is a third class of fees that one pays in the hope of getting something back, like higher returns from investment fees. These are a known expense in the uncertain production of income. We pay with a nervous smile. In other words, it only makes sense to pay an extra basis point if you expect more in return, but it would be non-sensical to optimise for the cheapest proposition. This requires a clear-headed evaluation of the evidence.

Where “extra layers” can be a problem

The points made above simply show that, all else being equal, the number of providers is not the issue, but rather the utility the investor receives and the price they pay. However, there are several practices that do raise some warning flags (and have been scrutinised by the FSCA), particularly where there is a duplication or overlap of services or fees, or where there are certain payments between Financial Services Providers. This does not automatically mean the practice is irregular or unethical, or that no value is added – it just requires much higher scrutiny:

The first questions that should be asked are:

    • Are there any duplications of the services provided by different entities?
    • Is more than one party charging for the same/similar services?
    • Is any party charging the investor for a service that is not being provided?
    • Is any party earning a fee for a service that another party is providing?
    • Is the party skilled, qualified, and appropriately resourced to provide that service?
    • Is any entity earning a fee for one service, but actually receiving it in consideration for another service (e.g. a fee for transferring assets to a product dressed up as a consulting fee)?


The move from generalist to specialist has been a trend since the agricultural revolution, which means multiple parties performing services that one party used to provide. In this model of “horizontal integration” (where a composite outcome is provided to consumers by independent entities), the costs and benefits of discrete services are potentially easier to disaggregate when it is compared to vertically integrated models, which involve cross-subsidisation of services. It is time to start asking the right questions and looking through the noise.