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Wealth Managers Make More Money from Client Investments than They Do

Investment Advice

We might be leaving the European Union soon but we haven’t yet and many investors may be grateful for at least one new EU directive that came into force from January. Mifid II forces financial companies to reveal all charges that impact their clients in a new level of detail that has revealed their services commonly cost far more than previously thought.

In 2013, the Retail Distribution Review came into force. This meant IFAs (independent financial advisors) had to either charge clients an upfront hourly fee for investment advice or reveal exactly what any commissions paid to them from companies offering investment products their clients bought into were. Before this, IFAs often advertised their service as ‘free’. In fact, it was anything but and clients becoming aware of exactly what they were being charged led to a huge change in the industry. Many, especially those with smaller investment portfolios, were unwilling to pay the relatively high hourly consultancy fees as it became apparent these added up to a higher percentage of overall returns than made sense.

However, until now, the same transparency had not been obliged of funds and wealth managers. Mifid II changes that and much of the information around hidden charges now being revealed is likely to have as profound an impact on this part of the financial services industry as RRD had on IFAs. This year, asset managers (funds and wealth managers comprising the two biggest categories of such) have to provide new customers with a full, granular breakdown of charges. Point of sale information on how much investments could grow with and without charges must be given to new prospective clients. From next year this information must be delivered to existing customers. However, there is nothing to stop existing customers of asset managers requesting the information now.

Making comparisons between fund charges is now a relatively simple ‘apples to apples’ comparison. Doing the same with wealth managers is more complex because of the range of variation between different services. Nonetheless, initial findings are likely to still prove unpleasant reading for their clients. The Telegraph newspaper’s Money segment approached several of the UK’s largest wealth managers, asking for details on the typical charges a customer with a £500,000 portfolio would pay. The general findings are that in most cases, wealth managers make more money from their clients’ investments than the clients themselves.

St James Place: over 10 years, assuming an average 4.3% annual growth rate on investments, total charges would total £164,000. The original £500,000 would grow to £597,000. That means that once all charges are deducted, actual annual growth to the benefit of the client drops to only 1.8%. The investor would make £97,000 and the wealth manager £164,000.

Netwealth: the wealth manager said that its typical service would levy an annual £3,240 in charges to a £500,000 portfolio, plus a set-up fee of £365.

Brewin Dolphin: £8,850 a year in charges on a £500,000 portfolio invested through the company’s ‘managed portfolio’ service.

Rathbones: declined to provide fees due to the fact they ‘differ between our clients’.

One of the most significant aspects to the Mifid II directive is that charges must be provided in pounds and pence and not as a percentage. Investors might not consider a 1% difference in charges between different wealth managers as overly significant. However, the feeling can be entirely different when that figure is represented in a concrete number and shown in the difference of projected overall portfolio value 10 years down the line.

Risk Warning:

Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.

There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.

Paul

The author Paul