What price tag should be attached to wealth management, and do its customers get what they pay for? These are not simple questions to answer, but thanks to a series of regulatory changes, they are being asked more frequently.
Charging structures were transformed two years ago when the Retail Distribution Review forced wealth managers to charge clients directly, rather than through commissions from product providers. While some companies already used a fee-based model, RDR forced the rest to join them.
“In terms of removing conflicts of interest between advisers and the funds they recommend, that has without doubt been a positive,” says Paul McGinnis, analyst at Shore Capital.
“One thing that might have surprised the regulator is that they may have expected the industry to move to charging for time spent, like lawyers and accountants, but a large portion of the market has continued with percentage-based charging.
“It’s not clear to me that costs have fallen much, but it’s a lot more transparent now.”
Wealth managers now hand prospective clients a “rate card” detailing their fees, but the Financial Conduct Authority, the City regulator, found in December that 36 per cent of wealth managers were not giving clear examples of initial charges and half were unclear about ongoing costs.
John Barrass, deputy chief executive of the Wealth Management Association (WMA), says there is “more to be done”. “The rate cards are all different according to the business model . . . Comparability is very hard to achieve,” he says.
One problem is the range of different costs that come into play, including upfront fees, exit fees, transaction charges and third-party costs. But campaigners such as the True and Fair campaign argue that this is simply obfuscation, with companies unwilling to put their costs in black and white.
They may face pressure from prospective clients. Research by the website Findawealthmanager.com found its customers expressed a strong desire for a figure that genuinely represented total costs and for “a simple way to compare the fees of several wealth managers”.
Analysis by Numis Securities indicates fees vary widely, but that the services of a majority of wealth managers surveyed cost more than 2.5 per cent a year of customers’ assets; total fees stretched as high as 7.5 per cent for short periods of investment. Among cheaper firms are Nutmeg, the online wealth manager, and SCM Private, which both charge closer to one per cent.
While customers want information, this does not necessarily translate into a desire to pick the cheapest. Findawealthmanager.com found people were specifically concerned with value for money, while Mr McGinnis sees little downward pressure on fees in the part of the market catering for investors with £250,000 or more.
On disclosure, more change is looming. New European rules under the second instalment of the Markets in Financial Instruments Directive (Mifid II) will force wealth managers and private banks to reveal all costs — including transaction costs and third-party payments like fund fees — in a single aggregated figure. This will take effect in 2017.
The WMA argues this will be hard to achieve, both in terms of sourcing the information and developing systems to process it. Of particular concern is a requirement to predict the impact of costs on the future value of investments. There are also potential conflicts between different European rules on cost disclosure.
However, Mr Barrass believes negotiations over the new rules will “come out in the wash” to the benefit of consumers, offering “some degree of comparability” between firms.
Investors face tax changes
Pension tax relief
One of the better signposted proposals to reform the UK tax regime will only affect additional rate taxpayers — those earning above £150,000 a year, writes Adam Palin. In the run-up to this year’s election, the Conservatives pledged to curtail the amount that the highest earners can save into their pension tax-free each year from £40,000 to £10,000.
Under the proposals, for every £2 earned above £150,000, £1 of pension relief would be lost. For those earning £210,000 and above, the reduction in tax relief is worth £13,500. Meanwhile, the chancellor has said the lifetime limit on tax-free pension savings will be cut from £1.25m to £1m next year — down from £1.8m in 2010-11.
Since April, shareholders no longer enjoy a tax advantage through special purpose share schemes. Previously, UK-listed companies could issue so-called “B” shares to investors, subsequently repurchasing them, offering a more tax-efficient return on capital than dividends. Any such returns are now taxable as dividend income.
The scope of individual savings accounts has expanded significantly over the past couple of years, with peer-to-peer loans expected to be included by early next year. The government has also committed to allow listed bonds issued by co-operative and community benefit societies in the tax-efficient savings products, which themselves can now effectively be passed on tax-free to a spouse.
Capital gains tax
The government’s pledge not to increase income tax, national insurance contributions or value added tax — the so-called “triple tax lock” — capital gains tax is seen as vulnerable to tax-raising changes. While higher rate taxpayers pay CGT — payable on profits arising from the sale of assets, excluding primary assets — at 28 per cent, before 2008 the tax was payable at a taxpayer’s marginal income tax rate.
More tax professionals expect reforms to CGT reliefs, rather than headline rates, with entrepreneurs’ relief tipped to be in the line of fire. The tax break, which allows those disposing of a business to pay CGT on their profits at a rate of only 10 per cent, has come under parliamentary scrutiny for costing billions more than originally forecast.
The most likely reform is seen to be a reduction in the lifetime limit for qualifying gains, reversing some of the increase from £2m to £10m during the last parliament.