Notice 1 of 2 – Proposed substantive changes to your

 Agreement with us

HFMC Asset Management Limited (“We/us”)

Your QuadrantTM Portfolio Management Agreement with us (“your Agreement with us”)

We are writing to give you 30 days’ notice of proposed changes to your Agreement with us, as required by clause 10 ii of the Agreement.

If you wish to object to the proposed changes you must do so by 1st January 2021.

This notice (Notice 1 of 2) describes and explains what we consider to be substantive proposed changes to the Agreement.

Notice 2 of 2 https://www.hfmcwealth.com/procedural-and-non-substantive-changes-to-hfmcam-terms-and-conditions/  describes and explains what we consider to be procedural and non-substantive proposed changes to the Agreement.

The proposed substantive changes

Summary

We propose to amend all our QuadrantTM Portfolio Management Agreements, including your Agreement with us, so that the charging structure for our fees and the charges of the Custodian, currently Pershing Securities Limited (“Pershing”), is changed as follows:

Our annual management fee

  • We will remove references to our charges being subject to VAT to reflect the fact that you will no longer pay VAT on our annual management fee;

Our custody arrangement charges to replace the Custodian’s charges

  • Instead of you paying the Custodian for its services through its annual charge and other incidental custody-related charges to you:
  • you will pay us an annual charge for arranging those services (“our annual custody arrangement charge”) together with incidental custody-related charges; and
  • we will pay the Custodian’s annual charge and other incidental custody-related charges from our annual custody arrangement charge and incidental custody-related charges to you;

The basis of the annual custody charge

  • We will charge our annual custody arrangement charge on a different, more graduated, basis to the basis used by the Custodian for its current annual charge.

Please read the following sections on the effect of, and reasons for, the proposed amendments. 

And please see Annex 1 for links to the wording of the proposed amendments and Annex 2 for tables showing comparisons between the proposed new and the existing charging structure and between the proposed new charging structure and competitors’ charging structures.

Effect of the proposed substantive changes

Effect of the proposed amendment in relation to our annual management fee and VAT

The proposed amendment will reflect the removal of VAT from our annual management fee, which will have the following effect:

  • all clients will pay less to us in annual management fees than previously because we will not charge VAT to them on those fees;
  • however, we will not be able to off-set VAT previously charged by us to clients against VAT charged to us by our suppliers and will incur a loss as a result.

Effect of the proposed amendment for our custody arrangement charges to replace the Custodian’s current charges 

The proposed amendment itself will have no material impact on clients.

The Custodian will deduct our annual custody arrangement charge and incidental custody-related charges from your portfolio and will pay these to us, it will invoice us for its annual custody charge and its incidental custody-related charges.

The basis for incidental custody-related charges will not change but we, rather than the Custodian, will invoice you for them.  These charges include charges for quarterly valuations and wrapper administration (such as for providing a SIPP).

However, the amendment to the basis of annual charges will have the material effect described below.

Effect of the proposed amendment to the basis of the annual custody charge

The effect of the proposed amendment for our annual custody arrangement charge to replace the Custodian’s current annual charge will be that:

  • The basis of the annual charge to you will change so that:
  • Our annual custody arrangement charges will be graduated to a greater extent than the Custodian’s annual charge;
  • a minority of clients (those with assets under management of less £360,000) will pay less in annual custody charges;
  • a majority of clients (those with assets under management of more than £360,000) will pay more in annual custody charges;
  • for the minority of clients who will pay less, the average decrease in annual custody charges will be around £107.
  • for the majority of clients who will pay more, the average increase in annual custody charges will be around £560.

Overall effect of the proposed amendments

The overall effect of the planned VAT and proposed annual custody charge changes will be that:

  • although the majority of clients will pay more in annual custody charges, over 99 per cent of clients will benefit overall. That is because, as a result of savings from the planned for VAT exemption, those clients will pay less in annual management fees and annual custody charges, taken together, so that:
  • for those clients within the 99 per cent of clients who will pay less in annual management fees and annual custody charges, taken together, the average saving will around £328 per year per year;
  • for those clients within last 1 per cent, who will pay more in in annual management fees and annual custody charges, taken together, the average extra cost will be £72 per year per year.
  • we will be compensated by clients, on what we believe is a fair commercial basis (as described in section “Reasons for the proposed amendments” below) for:
  • the loss caused to us by us not being able to off-set input VAT charged to us by our suppliers against output VAT charged by us to clients;
  • increased custody-related costs currently paid by us to the Custodian;
  • our work in arranging custody and liaising with the Custodian, and in dealing with general client care and fund management service initiatives and improvements, such as the application for VAT exemption.

Reasons for the proposed substantive changes

Reasons for the proposed amendment in relation to our annual management fee and VAT

Normally, discretionary portfolio management services are subject to VAT and, as a result, we have until now been registered for VAT and have charged VAT to clients on our annual management fee.

However, over the last eight months we have proactively discussed with our tax advisers and they have assessed that we meeting the conditions required for a VAT exemption to apply because our portfolios are similar in nature and characteristics to “special investment funds”, which are exempt from VAT.

We are accordingly electing to treat our service as VAT exempt from 1st January 2021.

We believe that exemption will be in the interests of all clients because:

  • it will not result in us having to change the nature or scope of our services to clients; and
  • we will no longer charge VAT on our annual management fee, saving clients 20 per cent on the fee.

However, for the moment, the proposed change will not be in our interests because we will not be able to off-set input VAT on supplies to us from output VAT on our supply of services to clients. Nevertheless, the saving to clients significantly outweighs the loss to us.

We therefore believe it is fair that proposed change to the annual custody charge should, among other things, compensate us for that loss.  We describe the reasons for that proposed change below.

Reason for the proposed amendment for us to charge you custody arrangement fees and charges in place of the Custodian charges

 We are proposing this amendment because it will give us greater control of the charging structure for custody services.

Reasons for the proposed amendment to the basis of the annual custody charge

Not all the Custodian’s fees and charges are currently covered by its annual charge and incidental custody-related charges made to clients.

Until now HFMC Wealth has met those of the Custodian’s fees and charges not covered by its annual and incidental charges to you, effectively from our annual management fee.

Those fees and charges include fees and charges for capital gains tax reporting, transaction reporting, and reporting to regulators.

For example, you may recall the introduction of MiFID II legislation in 2019.  That resulted in an increase in reporting of fees and charges to clients. Also, the US had previously introduced legislation known as The Foreign Account Tax Compliance Act (“FATCA”). This was followed by international agreements on exchange of tax information and UK regulations requiring financial institutions, including custodians, to report specified information to HMRC.

HFMC Wealth has been effectively subsidising its clients by meeting these costs on their behalf.   This is why your custody costs have been so low compared to the industry norm.

Market conditions are such that our group is no longer in a position to continue to make this subsidy but have invested to make the overall cost neutral for most clients by means of the VAT exemption described above.  The subsidy equated to around £48,000 per year and has increased from zero when we established our Quadrant portfolios in 2010.

As far as we are aware, across the discretionary fund management industry, clients rather than the portfolio manager, almost invariably pay these charges.  We have not previously asked our clients to pay these charges because we did not expect them to reach their current levels when we last agreed custody charges with the Custodian.  Had we not sought to take over the custody charging relationship as described above, we would have asked Pershing to take steps to charge these HFMC Wealth paid-for costs to clients rather than us.

Also, we have not previously separately charged clients for our own work in arranging custody and liaising with the custodian, and for dealing with general client care and fund management service initiatives and improvements, such as the application for the VAT exemption.  Instead HFMC Wealth have also met those, largely internal, costs from our annual management fee.

We now believe it is fair and appropriate for us to ask clients to pay for the HFMC Wealth paid for costs, and for our custody arrangement services, on a commercial basis, so that we are recompensed and remunerated in line with our discretionary fund management competitors.

We also believe it is fair and appropriate, as between clients, to structure our annual custody arrangement charge so that we do not impose fixed charges per client but instead charge clients on the graduated band/percentage basis as shown in the Annex 2.  As a result, those clients with larger portfolios will, on a graduated basis, pay more than previously in custody charges than those with smaller portfolios.

In our view, these are fair and appropriate steps to take because:

  • We will recover the effective subsidy that we have until now given to clients on custody-related costs;
  • We will not be adversely impacted by the VAT exemption, which as explained will benefit clients;
  • We will be reasonably remunerated for additional activities in relation to custody and general client care and fund management service initiatives and improvements, such as providing integrated custody solutions for our onshore and offshore clients; and seeking the VAT exemption;
  • As between clients, our costs for arranging custody and liaising with the custodian are inevitably larger for larger portfolios and we feel that those clients with greater assets under management should, on a graduated basis, pay more that those with lesser assets under management;
  • We will be able to apply our proposed annual custody arrangement charges to all clients with simple administration;
  • That approach should make reporting and disclosure of our proposed annual custody arrangement charges clear to clients;
  • Our custody charges will remain highly competitive within the platform and custody industry. Please note that they lower than those of the leading providers (please see Annex 2).

Important notice

Please also note that, as already mentioned, if you wish to object to the amendments described in this notice, you must do so by [1st January plus 30 days]

You must give your objection in writing and provide it to the following postal address:

HFMC Asset Management Limited, 29 St John’s Lane, London, EC1M 4NA.

ANNEX 1

The proposed changes in this notice (Notice 1 of 2) are reflected in the following parts of our new Application and Terms of Business Pack:

  • Clause 23 (Custody, dealing and the Custodian) and Clause 31 (Fees and Charges) of the Terms of Business Section
  • Part 2 of the Responsibilities and Fees and Charges Section.

ANNEX 2

Comparison of proposed new charging structure to existing charging structure for annual custody charges (blended rate includes valuation and CGT calculation charge)

Comparison to other market leading platform solutions

Note: Thresholds for Transact is 0.28% to £600,000, and 0.18% to £1.2m

Sources:

https://www.transact-online.co.uk/our-charges/

https://www.hl.co.uk/investment-services/fund-and-share-account/charges-and-interest-rates

Comparison to other market leading platform solutions custody charge (blended rate including valuations and CGT calculations and assuming maximum amount invested in banding)