Out with the old, in with the new – our guide to changing wealth manager
Friday, May 22, 2020
Different fee structures and the use of percentages when discussing charges can be confusing. If you are using the services of a wealth manager for the first time, it is difficult to know where the fees sit in relation to the wider market, and how they are being calculated.
According to the 2019 EY Global Wealth Management Research Report, “pricing transparency and competitive fees are two of the top five most important factors for clients when evaluating and selecting wealth managers”.
Yet the same research report, which surveyed 2,000 wealth management clients across 26 countries, reveals that only 56% of clients say they fully understand the fees they pay. The report found that fee awareness is lowest among older clients and those with low levels of wealth or investment knowledge.
Understanding exactly what it is you will be charged is vital, because over time fees can erode your investment returns and eat into your wealth, and you don’t want any nasty surprises.
The Wealth Consultant is here to help you navigate the wealth manager journey, including how to talk about and understand fees.
We all like to know exactly what we are getting for our money. If we are willing to pay more, it is usually because we know the quality of the product or service is higher. Cost transparency and value for money also apply to wealth management.
Wealth managers charge clients for managing their money. The question is – how much, and how do they go about doing this? You can learn more about wealth management by reading our guide “Getting to grips with wealth management“.
There are some common fee structures used by wealth management firms to charge clients for their services.
Toby Glover, Portfolio Director at Cazenove Capital, says: “Wealth managers tend to charge a fee calculated as a percentage of assets managed for a client. Many offer a tiered fee scale, with the percentage falling as assets rise. It is important to ensure you are paying an appropriate fee for the
service and performance you receive.”
It is important to note however, as said by Christopher Barrett, Investment Director at JM Finn: “More often than not, fees for investment management and wealth planning are separate, with investment management fees being a percentage of the portfolio – typically in the region of 1% per annum – dependent upon the size of the portfolio. Wealth planning fees are either charged on an hourly basis for the work taken or as a percentage of the wealth on which the advice relates to.”
Meanwhile, an alternative approach is taken by Jenny Tozer, Partner at LGT Vestra, who says “their standard all-in fee structure is tiered: 1.25% on the first £500k and 1.00% on everything thereafter. On amounts of £2m+ the fee is 1.00% all-in.” This structure affords peace of mind to those investors who want to know exactly what it is going to cost, although it may not work out to be the cheapest.
In addition some wealth managers will charge an hourly rate for the work they undertake for you, or charge through commission on each trade that they carry out. But it could also be the case that the firm uses a combination of fee structures.
During your initial one-to-one with a wealth manager through The Wealth Consultant, you should ask for a full explanation of the fee structure relating to your needs. Make sure you get this in writing.
Under scrutiny – things to look out for
Mr Barrett flags two important things to look for when it comes to fees.
“Firstly, to ensure that any performance figures you are being quoted are after, or net of, fees,” he says.
“Secondly, depending on how your portfolio is invested, there might well be a second layer of fees that are more difficult to calculate. For example, if your portfolio is invested in funds, the cost of those third-party funds will be built into the fund price paid, meaning the amount paid by the end investor is not always obvious.”
Wealth managers, and the wider financial services industry, are under pressure both from clients and the regulator to set fees out in a way that is transparent, and to provide value for money for their products and services.
Will Dobbs, Investment Manager at Charles Stanley, says “fully transparent underlying charges (third-party fund charges, for instance) should be made clear from the outset.”
He also adds that, “You should avoid paying initial charges or exit charges, as this detracts from your long-term returns before you have even started and also hinders any future decisions you might need to make.”
What is right for you?
The amount you are likely to pay for wealth management will depend on your own circumstances, such as how much you have in assets under management and existing investments, and what type of service you require from your wealth manager – whether it is pension consolidation, tax-efficient investing, estate planning or retirement planning, or a combination, for example.
The 2019 EY Global Wealth Management Research Report asked clients what their preferred
payment methods were, with the following results:
Mr Glover encourages you to “challenge your wealth manager on underlying costs and look at the total expense ratio (including VAT) before you commit. However, do not lose sight of the main goal, which is meeting or exceeding your performance objective net of all fees with the highest level of service.”
It is worth knowing that most wealth managers will only take on clients with investible assets of at least £100,000 or more. Any less, and neither party will be getting value for money. However, don’t despair, there are still plenty of options for investors with assets below that.
When it comes to using a digital “robo”-adviser or execution-only platform, the fees are likely to be lower. You can read about the definitions of these types of personal finance options in The Wealth Consultant’s Who’s who in personal finance.
Essentially robo-advice is financial advice but without the personalised advice that a face-to-face meeting with a professional adviser or wealth manager can offer. While execution-only is the platform on which to execute trades, more suited to the DIY investor.
The lower costs can be one of the main reasons for using these types of service, but there are also limitations. A survey published in December 2018 by Boring Money and Quilter reveals that investors who build their own portfolios can miss out on potential gains of 11.3% a year. While investors may be investing their money for a lower fee, they also are not growing their wealth as much as those who seek advice from wealth managers.
Regardless of your wealth, we believe that everyone should have access to professional investment advice. Giving you peace of mind that your financial wellbeing is in good hands. The Wealth Consultant makes it personal to you.