Wealth managers may not always blow the lights out when it comes to their discretionary investment skills, yet they do make great investments.
Even better, they are ideally placed to benefit from RDR, as well as the side effects of an ageing, wealthier society. However, the sector faces a whole heap of challenges, not least the rise of increasingly fussy clients who demand more for their money.
In my, admittedly imaginary, world I can see lots of animated conversations between wealthy clients and their advisers about exactly what service the firm offers. There might even be the odd letter like this one.
Dear wealth manager,
Thank you for your recent statement regarding my investments, which shows a steady but rather predictable increase. As I am one of your more polite customers – one who has valued your service greatly in the past – I was wondering if it is possible to arrange to meet with you to discuss a number of ‘challenges’ I think we both face.
Dear wealth manager...
My first issue is one that could be classified as perhaps “wanting to have my cake and eat it” but concerns the evident conflict between my desire to preserve my hard-earned capital and my need to actually grow my wealth.
Obviously, when times are bad, wealth preservation is immensely important, whereas now the markets seem a tad more confident, I would quite like to ease off the cautious stuff and make some more money by participating in the upside.
I would like to be sure my manager knows when to switch between caution and growth.
It does appear to me there is a massive conflict between a promise to moderate the down bits of the markets and the absolute requirement to grow my wealth at rates well in excess of inflation, in order to have any purchasing power in the future when I retire.
This is a challenge indeed that may require you to be more honest with me by suggesting I increase contributions during certain periods of time. But I am afraid it is what I pay you for. If wealth preservation and growing my wealth at a sufficient pace are mutually irreconcilable, then please have that conversation with me.
In particular, my career in business has led me to be a bit suspicious of certain underlying assumptions I suspect may be at work. I have long thought risky stuff like shares should be growing at, say, 6% or 7 % per annum as a long-term average, but the reality may be somewhat different.
Given the stupendous returns from my bond portfolio over the past decade, I cannot see that bit growing very fast when compared to racy shares.
The other challenge I wanted to discuss with you relates to how you charge me.
Obviously you have to have a sustainable business model but, on reflection, I cannot help but think a percentage charge for assets under management is an unsustainable one.
I realise there is a tapering of charges based on how much money I actually leave with you, but why should that be so? Surely as every client is individual, then their requirements are unique? If that is the case, is there not a degree of cross-subsidy going on here where wealthier clients overpay to service the poorer clients?
Astonishingly, some very well-known people I have never heard of, such as a certain Charles Schwab, seem to be doing strange stuff like offering their customers these new fangled exchange-traded fund thingies at zero cost. How on earth can they make a profit? Other newer names seem to be charging monthly fees, flat fees or vastly reduced charges based on the money one has with them.
Bringing together these two challenges brings me to my really big question. I read in the August papers we might have to put up with average returns of just, say, 5% per annum for the next few decades from my bonds and shares portfolio. Given my total portfolio costs, including your charges, amount to well over a third of that net return, how can this be regarded as reasonable?
Given all these new structures that seem to be emerging, it seems to me a total all-in cost of not much more than 1% seems reasonable.
If not, surely the temptation will be for me to use you only for the complex stuff like estate planning, tax advice or business assets and use cheaper, perhaps internet-based platforms to run the decision making about whether to shift between growth and capital preservation? Clearly, I may have got entirely the wrong end of the stick and I welcome the opportunity to have a nice cup of tea and biscuits the next time I am up in London.
1 Acacia Avenue, Tunbridge Wells
David Stevenson is a Financial Times columnist, editor at Portfolio Review and consultant. Follow him on Twitter @advinvestor
Suggested replacing incentive share awards
Provided $710bn during 2008 crisis
Further £10bn needs to be put aside
Aimed at retirement market
Earliest date for inclusion is October 2016