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Nearly four years after landmark reforms designed to shake up the financial advice market, the amount that private investors pay for investment advice has barely fallen, and many firms’ fee schedules remain mired in complexity.
According to accountants Grant Thornton, someone who entrusts £100,000 to a UK financial adviser or investment manager for a decade would pay 2.56 per cent of their pot every year, on average, for financial planning and the costs of holding financial products.
In December 2012, when the UK’s then regulator the Financial Services Authority (now the Financial Conduct Authority) implemented new rules to govern financial advisers in its Retail Distribution Review, that average cost was 2.86 per cent.
RDR scrapped commission payments to financial advisers by product providers on new business and aimed to introduce greater clarity between the different types of services investors could pay for.
The regulator said the reforms would “increase transparency of prices and enable competition” adding that charges should be disclosed in a “clear and upfront manner”.
In today’s income-starved market, the cost of advice is arguably of even greater concern to investors. The average private client with money in a steady growth-focused discretionary portfolio achieved a return of 2.3 per cent in 2015, according to private wealth index provider ARC.
All ongoing costs of running the discretionary portfolio — a type of investment where clients’ stocks and funds are chosen for them — were subtracted by ARC. But the costs of financial planning and advice, of administering tax-efficient wrappers such as Isas or pensions are not accounted for.
Wealthy consumers, says Bertie Gore Browne of Gore Browne Investment Management, “must look at fees very closely, as paying 2 per cent to 3 per cent a year is not justified in a time of low investment returns”.
Although the percentage amounts seem small, for regular savers, the compounded effect can be large.
Compare the advice market
We can go online to assess mortgages, holidays or phone contracts. Yet many financial advice and investment management companies do not display the total annual cost of using their services on their websites, instead offering charges for individual products or services, such as “financial planning” or “investment platforms”.
“If you were an average saver going online to put a shortlist together of companies you may interview to become your longstanding [financial] adviser, there is no easy way of understanding or comparing the likely costs,” says David McCann, an analyst at Numis Securities who follows the investment management and financial advice industries.
David Harrison, a financial advice industry veteran who runs wealth management services business True Potential, adds: “Consumers get a poorer deal because they have no way of comparing advice costs accurately.”
Financial advisers and wealth managers often argue that it is hard for them to express a price for their services on a website because each client chooses different services.
At Hargreaves Lansdown, for example, someone using the “portfolio managed service” has a choice whether or not to take financial advice on an ongoing basis.
It is similar to going to a restaurant, where one has an idea of the cost of the meal, but does not know one what one will order.
Following the changes brought in by RDR, most people hiring a financial adviser will have a percentage of their portfolio subtracted at the outset as an “upfront charge” to cover financial planning and the set up of their investment portfolio. This charging method is often referred to as “ad valorem”.
“If it is 2 per cent, each £100 invested starts out as £98,” explains Graham Harrison, the managing director of ARC.
Large companies typically handle both advice and investment. Smaller advisers might subcontract investments to companies who run what they call “discretionary” or “bespoke” portfolios if the client has several hundreds of thousands of pounds, or more basic “model” portfolios if they have less.
In subsequent years, an “ongoing charge” is levied on the money invested. Most companies state a percentage amount on their website or in fee schedules. This can appear lower than actually is, however, if it is disclosed ahead of other costs such as share dealing or VAT.
Brewin Dolphin, for example, says the ongoing charge for its financial planning and investment service is 1.3 per cent a year but a company spokesman confirms that this excludes VAT, and that investors holding funds, shares and EFTs will have an additional cost of 0.35 per cent.
As well as the cost of advice, investors need to be aware of the costs of different investment products. Clients’ money is often invested in funds run by professional stock pickers, and these will attract additional charges. With fund investments, the figure to look for is the total expense ratio (TER) or ongoing charges figure (OCF), which includes the management charge plus most other running costs. A typical TER for an actively managed fund might be 0.75 per cent. For a tracker, expect to pay 0.2 per cent or less.
How to bring costs down
The cash rich and time poor may consider paying a professional to handle investment decisions — be it a financial adviser or active fund manager — to be money well spent. However, this should not stop investors from asking if they are getting the best value, says Abraham Okusanya at Finalytiq, a consultant to wealth managers and financial advisers. An affluent client with a large portfolio to bring to a financial adviser or investment manager should be able to argue down percentage-based, he advises.
Mr Okusanya believes that someone with £1m to invest should never pay anything close to 2 per cent for upfront advice for ongoing financial work.
“The initial charge is for financial planning,” he says. “It would be hard to get to £20,000 of work here, because 15-20 hours of work would have to be done for the client at the beginning of the relationship, and some of this will be done by a paraplanner, whose hourly rate would be lower than the financial planner’s.”
The average hourly fee for a UK financial adviser is £150, according to unbiased.co.uk, although high-end wealth managers in central London can charge £350 or more.
It is common for wealth managers to say they are providing their clients with a “bespoke” service, which suggests professionals are picking stocks or funds just for them.
The term is not a regulatory one, however. Paul Killik, founder of Mayfair wealth manager Killik & Co, says it is a throwback to the 1980s, when brokers could run personal portfolios for each client. “If they had a preference for technology companies, or the Far East, you were able to cater for that.”
Nowadays, he says, the FCA requires investment managers’ compliance departments to monitor investment mandates closely to assess suitability.
“A compliance department, which has to have a drop-down overview of the risks you are taking, could not monitor hundreds or thousands of individual portfolios, as otherwise they could not ensure to the regulator the business is being properly managed,” he says.
Graham Harrison at ARC agrees. He says investment portfolios tend to fall into a few distinct categories, such as “conservative” or “steady growth”. The word bespoke “makes people feel special”, he says, while a manager offering this will in fact have “maybe 18 investment solutions” that fit most clients’ needs. They can “flex this model”, he adds, “for example if a client hates oil shares or does not want exposure to Japan”.
“A truly bespoke service would be provided by the private investment office of a very wealthy family, who have done the equivalent of hiring their own tailor,” he says. What retail investors get is comparable to a ready-made suit, he adds. “They can change the pockets or the lining.”
Providers of services labelled “bespoke” argue the added extras are crucially important, as they can offer wealthy clients additional services such as tax advice.
“Do not underestimate the value of a customised approach for wealthier clients in ensuring they mitigate potential exposure to capital gains tax or inheritance tax, as the benefits from tailor-made investment management can be very considerable,” says Jason Hollands, managing director of Tilney Bestinvest, adding that such services “vastly outweigh any fee benefit from a canned solution bought from a website”.
If you are tempted to change your adviser, one final word of warning — there can be an exit fee. For example, FTSE 100 wealth manager St James’s Place will levy exit charges of 6 per cent on pension investmentsif clients leave the company within the first year, falling to zero after six years.
SJP managing director David Lamb said: “We strongly advise clients to invest for the medium term and do not advise investments for less than five years.”
Four low-cost alternatives for investors
Post RDR, the upfront-plus-ongoing costs model is the default charging model, and is popular with advisers because it gives them a predictable revenue stream. Europe Economics, which was hired by the Financial Conduct Authority in 2014 to report on the changes to the financial advice industry since the 2012 reforms, estimated that up to 90 per cent of the industry was charging in this way.
Here is the FT Money guide to the four main alternatives:
Fee-based financial planners
Fee-based financial planners can assess investment needs and retirement goals, charging on an hourly basis. Their hourly rates can be as high as a solicitor’s, although for larger portfolios they can prove better value than a 2 per cent upfront charge.
Those serving higher-end clients include James Hambro & Partners, Capital Asset Management and Kennedy Black. High street independent financial advisers may also be more willing to accept a flat fee for a service.
At the end of 2015, financial advice portal Unbiased.co.uk surveyed 217 advisers and found that while just 14 per cent were charging on an hourly basis, 45 per cent would accept a flat fee for a one-off financial planning project.
For investors with less complicated financial affairs, a robo-adviser could cut costs. Currently more popular in the US than in the UK and Europe, online-based investment services such as Nutmeg are growing in popularity with younger, tech-savvy investors.
Nutmeg charges a maximum annual management fee of 0.95 per cent for managing clients’ money, keeping costs low by constructing portfolios from cheap, passive products that mimic the performance of stock markets such as the FTSE 100, or asset classes such as government bonds. Its average annual fund charge is 0.19 per cent.
Traditional advisers argue that you get what you pay for, noting that robo-advisers lump investors into fairly basic categories, and do not offer face-to-face advice or financial planning. But the sector is growing in popularity.
Cardiff-based Wealthify and German company Scalable Capital, have also launched this year, as has MoneyFarm, an Italian company. In a bid to lure new customers, MoneyFarm announced in February that it would waive all fees on Isa investments under £10,000 and over £1m, pushing robo-advice fees to a new low for some investors.
A self-directed model portfolio
As well as the robo-advisers, investors looking for a low-cost alternative to traditional wealth management could consider the self-directed model portfolio approach offered by a wide range of brokers — including Hargreaves Lansdown, Charles Stanley, Fidelity, and Bestinvest. These are a popular way of investing tax efficiently within a stocks and shares Isa.
How much of your fee goes towards the online broker and how much goes towards paying for the funds (as an annual fund charge) varies. Hargreaves and Bestinvest will charge 1.4 per cent and 1.5 per cent respectively for buying into their off-the-shelf portfolios, along with a 0.4-0.45 per cent annual platform charge. AJ Bell, meanwhile, will levy a 0.22 per cent fund management fee and no platform fee for its Global Tracker Portfolios. Sitting between these offerings cost-wise are Charles Stanley, Fidelity and Trustnet Direct.
Investors who also use these platforms to trade shares directly should be aware that dealing costs vary widely, ranging from a minimum of £5.95 at Hargreaves Lansdown to £12.50 at Alliance Trust.
Deal direct with asset managers
Retail investors can also look forward to dealing directly with asset managers, who are themselves realising that they can bypass the middlemen and go straight to their customer, cutting out advisers and wealth managers. Dutch fund house Robeco, Deutsche Asset & Wealth, and US low-cost giant Vanguard are all working on direct-to-investor offerings, but these will probably only offer portfolios built from in-house funds. Investec Wealth, the wealth management arm of the South African bank, is set to launch a robo platform this year to service clients with fewer assets.
According to Citigroup, assets managed through robo-advice companies could reach $5tn (£3.8tn) over the next decade.