When Christine Ross inherited a new client from a colleague heading off into retirement, the customer made clear he had only one concern when it came to the question of fees – and it was not about how the wealth manager’s charges stacked up against rivals.
“He wanted to know that he didn’t have an inferior charging structure to any of our other clients with a similar amount invested,” says Ross, client director at Handelsbanken Wealth and Asset Management.
With a long career in wealth management, Ross has seen a full range of attitudes to fees and charges among well-heeled clients. Some are more concerned with market performance than variations in cost structures, while others will be determined from the outset to drive a hard bargain on fees.
But the current conditions of high inflation, economic uncertainty and the paucity of safe havens amid the market turmoil bring heightened concerns over one of the few elements of a relationship that clients can influence, and one that can make a material difference to long-term returns .
“People do look at fees and increasingly so, because they know that they’ve got to make this money work. It is absolutely a discussion, ”she says.
By far the most common charging model for investment management services is “ad valorem”, an annual percentage fee of the client’s assets. When the manager makes the right choices or the market booms, this means they and the client benefit. When things take a turn for the worse, the fee income pulled in by the manager falls along with the shrinking value of the portfolio.
The industry template is the “tiered fee”, under which managers offer lower fees for those with bigger sums to invest. A 1 per cent charge on portfolios of up to £ 1mn, for instance, might fall to 0.75 per cent for assets between £ 1mn and £ 2mn, and 0.6 per cent above £ 2mn.
There are also usually differences in fee structure for investment management advice depending on whether a client chooses so-called “discretionary” services, where the wealth manager has a license to make changes to the portfolio without getting permission, and “advisory” portfolios, where the manager must seek the client’s agreement for every move. Advisory arrangements can be as much as 0.25 to 0.5 percentage points dearer.
Clients with less to invest may have little room for negotiation. But with new low-cost competitors coming into the market and regulators demanding greater transparency on charges, wealth manager fees have declined overall in recent years, especially for larger clients with £ 3mn or more.
According to a survey of wealth managers, both discretionary and advisory, by Savanta, wealth managers are more concerned about the general pressure of competition than specifically about losing clients to low-cost, alternative providers.
Only 43 per cent of those polled said they were “slightly” or “very” concerned that they would lose out to the low-cost rivals. But nearly 70 per cent of businesses said they were “slightly” or “very” concerned about the growing competition in a tougher, more price-conscious market.
For those approaching a wealth manager for the first time, it is important to understand that the headline fee quoted by the manager for their services may not include all the costs. When a manager chooses an external fund as part of the investment portfolio, for instance, there will be an associated annual fee. Fund fees have dropped in the past decade or more, but may still be material.
Financial planning may also be part of the overall fee, or not. Some firms charge a percentage of assets to provide advice on things like inheritance planning or pension reviews; others will charge a flat fee for advice.
Lee Goggin, founder of Findawealthmanager.com, a matchmaking site acquired last year by wealth manager 7IM, says that in addition to a basic management fee of between 0.5 per cent and 1 per cent, other charges may include financial planning (around 0.2 per cent ); underlying fund fees and custody fees; and transaction fees for changes to the portfolio.
He says that these fees may be easily justified by a combination of good planning and smart investment but clients need to know up front what they can expect to pay. A key question he recommends asking before signing up is: “What is the total expense ratio – the total amount of money that I am going to pay for the service in its entirety?”
Over the past year he has noticed an influx of people suffering from “investment vertigo”. Having put money into the stock market during the pandemic, many have done very well, perhaps doubling their funds since March 2020. But this can also bring problems.
“There may be tax implications, or rebalancing needs, and getting the right advice in these circumstances can be more than pay for itself. . . paying 1.5 or 2 per cent to someone who optimises your portfolio will easily pay for itself, ”he says. “If you’re a DIY investment warrior and you’ve had a good run, you may have neglected to look at the planning aspects. If you’ve taken some decent risks, you’ve made a lot of money and you’re of a certain vintage, do you still need to be taking those risks? ”
Others in the industry downplay the role of fees among clients’ biggest worries when so much uncertainty is roiling markets.
Ian Sackfield, managing director of investment management services at Charles Stanley, says fees may be an important part of the “value proposition”, but adds: “In our experience it is certainly not what clients are talking about at the moment. What they are talking about is how to preserve their capital and prevent its value being eroded by inflationary pressures, immunizing their portfolios against volatile markets, and ensuring the legacy they leave their loved ones remains intact. ”
For Ross of Handelsbanken, fee negotiations are always more likely to crop up with certain types of client, such as business owners or entrepreneurs for whom dealmaking is second nature. “I have been told to sharpen my pencil by potential clients. For me, it probably happens about 20 per cent of the time. At the end of the day people will say – is that the best you can do? ”
Goggin cautions that the natural tendency to focus on fees, performance and service level – the “cornerstones” of wealth management – can lead people to neglect the fourth, more intangible, factor: how you feel about the person offering their services.
“Do you like the man or woman who is going to be your wealth manager for possibly the next 10, 15 or 20 years? There’s logical thinking involved in making the decision. But ‘gut feel’ is really important too. ”