A sense that the clock is ticking on lockdown is lending real urgency to the need to get proactive about our financial affairs, and across a range of areas too.
Traditional wealth management fees have come in for criticism recently, but investors need to appreciate both sides of the debate, argues Lee Goggin, Co-Founder of findaWEALTHMANAGER.com.
Wealth management fees have been high on the media agenda. The rise of robo-advisers and DIY investment platforms have made cost-effective, entry-level investing a reality; there has also been the effect of regulatory rules imposing greater fee transparency on investment firms. These have combined to make investors at all levels more cost-conscious and the press in its turn has rightly taken up the cudgels to fight for value for money.
Since we work with such a variety of institutions and carry out wide-ranging client research, I am frequently called upon to comment in the press. I sometimes find myself defending the industry from misperceptions that it is opaque and overly-expensive, and I am glad I have been able to point out that wealth managers can actually offer really good value for money – and that that value that is amplified by the superior performance and risk management a professional firm delivers too.
Yet there are many other subtleties that investors also need to understand, but which often get lost in the noise. You do find really well-balanced articles examining how wealth management fees are charged and the value they represent, but unfortunately you also often see the industry unjustly maligned and unfair comparisons being made. Comparing traditional wealth management fees with those levied by DIY investment platforms or just buying ETFs is simply “apples and oranges”.
It is healthy that fees are under greater scrutiny and investors should know that the industry itself is working hard to better communicate the value it is delivering to them. For our part, helping both sides understand each other on better on the fees front is a big focus of findaWEALTHMANAGER.com’s client research and the content we produce.
The first point to make is that fees can be by necessity somewhat complex due to the layers of costs that constructing and managing a portfolio can involve. These will include some – like VAT on share dealing – that the institution is mandated to impose, along with others like custody, nominee, fund manager, platform and transaction fees which are levied by third parties (and which may apply equally to DIY). Foreign exchange charges and costs for overseas brokerages or financial planning add more layers. It is hard to say what a client “should” pay because their needs vary so much, but 1.5% of assets per annum (or sometimes even lower) is commonly negotiated.
Good wealth managers will be only too happy to unbundle their entire fee schedule, and explain any charges which may be listed separately from the Total Expense Ratios which are now increasingly given to clients as standard. When you are reviewing prospective providers it is essential to ensure you are comparing like with like on fees, so seek clarification where required.
Most importantly, when assessing what represents good value ensure you look at fees in the round – and think about the tangible and perhaps more intangible benefits to your financial position consolidating your investments with a leading wealth manager might bring. Consider, for example, institutional pricing power, with discounted fund manager charges often making investing through an intermediary – rather than the DIY route – the more cost-effective option. Adding incremental gains like this wherever possible to robust investment returns could make you achieve your goals all the sooner.
Thinking more broadly, the majority of our users seem to have come to the conclusion that DIY investing can be a false economy. Consistently, 60% are seeking a discretionary relationship, with busy professionals, entrepreneurs and retirees alike saying they lack the time, expertise or inclination to manage their own investments. Amid fears of another global recession, they feel that managing wealth is something best delegated to an expert. They also increasingly speak explicitly about net gains and why it is worth paying a premium for outperformance. Lower costs, but also lower returns is no way to make real money.
In conclusion, the bottom line on wealth management fees is your bottom line – what an institution will add in terms of investment outperformance, but also other gains added by its expertise, infrastructure, networks, and facilities like Lombard loans or private mortgages. None of this is available to the DIY-er.
The fee debate is more complex than it might first appear. Balance is required while some unjustly focus on wealth managers’ “hidden” fees. Investors need to remember where they offer hidden value too.
To set up a discussion about optimising your wealth with a professional adviser, simply try our smart online tool.