People tend to focus on performance without fully appreciating that small differences in investment costs also make a massive impact on your wealth. Here is one investment health check you must perform as soon as you can.
Working out which wealth manager is right for you usually revolves around three inter-related considerations: fees, investment performance and service offering. How far investment performance translates into net gains is what counts, as higher fees can really eat into returns. That said, there may be elements of a service clients are willing to pay a premium for. The key is making a conscious choice.
Regulatory reforms have made wealth managers’ charging structures far more transparent – starting with the UK’s Retail Distribution Review of 2013 (which eliminated hidden commissions) and more recently the EU’s MiFID II legislation. This came into force at the start of 2018, compelling investment product providers to break down all costs transparently, covering ongoing management, entry/exit, performance and transaction fees.
However, wealth managers’ fees can still be somewhat complex by necessity, due to the layers of costs that constructing and managing a portfolio can involve.
The fees which apply will depend on your service package and the make-up of your portfolio. Some of these – like VAT on share dealing – are not something institutions can control, but others very much are, so it really pays to read “the fine print”.
Wealth managers’ offerings also tend to differ quite widely, making unpacking their fee schedules essential when assessing providers. Understanding which fees are likely to be applied and when is vital for making fair comparisons.
Not only will a thoroughgoing understanding of charges allow you to recognise which provider is best value, it will also mean you are better placed to negotiate should you wish.
Your private bank or investment manager will probably charge an annual headline management fee for running your investment portfolio, which is typically around 1.0-1.5% per annum, as a proportion of the total assets under management. (These are also known as “ad valorem” fees, coming from the Latin “of the value”.)
You should note that although management fees are quoted as annual fees, they are likely to be levied quarterly. They are charged on the value of your portfolio either on a specific date, or taken as an average value over the period.
While a management fee might seem like an “all-in” figure, in reality there may be several additional charges to be applied to your portfolio. It generally covers the advice and expertise of the wealth manager, but not the costs incurred in trading your investments.
You can work through the list below with a potential wealth manager to find out which costs may apply to your portfolio, whether they are included in any management fee you are quoted and if any savings can be made.
Third-party funds may form a significant part of many investors’ portfolios (as opposed to direct holdings like shares and bonds), meaning that the fees of the underlying managers also need to be taken into account. These vary widely between different managers and strategies, so are essential for clients to understand.
Annual management charges are normally quoted exclusive of VAT, which will amount to 20%. Stamp Duty Reserve Tax (SDRT) is also applicable to electronic share transactions.
Transaction costs may be included in the management fee, but often are not, and depending on the market of the trade can range from 0.5% to 1.5%.
The frequency of transaction fees coming into play can be also be quite difficult to predict, as how often they will be incurred depends on factors like the style of the wealth manager, the client’s objectives, market conditions and how often a portfolio needs rebalancing. The impact of “churn” is something DIY investors often don’t take into account.
Excessive fees could prove a real drag on your net gains over time, so make sure transaction costs are minimised where possible.
If you are using a private bank, you can expect to be charged custody fees on deposits in the range of around 0.2% a year.
To make buying and selling them easier, investment managers will usually hold clients’ securities in “nominee accounts” (where the firm nominally owns the stocks or shares, but the client remains the ultimate owner). Under this administrative arrangement there may be costs incurred for the collection of interest and dividends from your investments.
Most of a typical UK client’s investments are likely to be liquid (easy and quick to sell) and traded on the main markets. However, if you invest in equities or bonds that are illiquid and trade on less usual exchanges, then a broker may be required to expedite buying and selling them at the best price. It is a regulatory requirement for wealth managers to prove “best-execution” on trades.
The broker will charge fees of anything from 0.05% to over 0.2%, depending on the challenges of the trade.
Dealing in foreign currencies to buy and sell overseas assets will incur commission charges.
Performance fees are based on the returns a wealth manager generates from running your investment portfolio, calculated as a percentage of the overall performance.
Performance fees are commoner among hedge funds and so on, where high returns are being very aggressively pursued. However, if you choose a wealth manager which charges performance fees you will only have to pay them once a positive return over a certain threshold has been achieved.
Other costs may apply at the beginning and end of a relationship. Before they are fully invested, cash balances may incur charges, while placing investments into tax-efficient “wrappers” such as an ISA, pension or offshore bond may entail initial set-up costs. At the other end, some firms impose exit charges.
Since there are so many layers of fees which may (necessarily) apply, the figure to pay real attention to is the Total Expense Ratio quoted by an asset or wealth manager. This allows investors to see at a glance the total costs of holding investments and are a good guide to total annual costs (like the APR – or Annual Percentage Rate – on loans).
When weighing up providers, it is essential to compare them on a like-for-like basis, as closely as any differences between their offerings will allow, and a good wealth manager will be very happy to unbundle their entire fee schedule to facilitate this
TERs are now increasingly given to clients as standard (and firms should readily explain any charges listed separate to it). Even if a precise figure is unavailable a wealth manager should be able to give a range for what has been typical for an investment mandate similar to yours over the past few years.
If you would like clarification on any part of a provider’s proposed package, then simply ask for it. Our expert team is also always on hand to go through your options with you, so please do get in touch with any queries.
Along with examining performance figures, getting granular on wealth management fees is a key part of securing the best provider. You need a wealth manager which will achieve robust returns on your investments and also one where those returns are not eroded by fees that are too high. Over time, a seemingly small difference in costs can have a huge effect on your total wealth, as the following examples show.
Imagine client A pays their wealth manager an annual fee of 2.5% on an investment portfolio worth £1m, while client B pays 1%. Over 10 years, client A will pay out £364,335 for their adviser’s management fee alone, while client B will pay £155,752 – less than half. Big savings are eminently achievable if you shop around: our research shows that users of findaWEALTHMANAGER.com can save an average of £15,000 every year in fees, based on a £2m portfolio.
The effect fees will have on a portfolio’s value can be illustrated as follows. First assume constant returns of 10% per annum for two fee structures: a TER of 1% versus a TER of 1.5%. All else being equal, £1,000,000 invested over 25 years shows a return difference of almost £1,000,000 – or the entire original investment. Even the seemingly small difference of 0.5% can have a huge impact on your overall wealth over time.
Get proactive on price
Newcomers to professional wealth management, or existing clients considering a change, often worry about excessive or hidden fees. But they certainly need not: findaWEALTHMANAGER.com only works with wealth managers committed to transparency and better-value fees.
We exist to help investors assess potential wealth managers objectively, so that they can eventually choose the one that feels right for them. Whether you are an experienced client seeking a better deal or a new investor unsure of what “good” looks like we can help.
To start the process of find the right wealth manager, simply complete a short questionnaire on your profile and let our smart online tool filter the market to find your best-matched firms.