“The bears have killed Goldilocks.” Royal Bank of Scotland’s widely shared research note from January 2016 set out a worst-case scenario for markets over the year ahead: weaker growth in China, global deflation and the price of oil falling as low as $16 a barrel. Sell everything save high-quality bonds, the analysts argued. The note summed up the prevailing market uncertainty.
It is at moments like these when wealth managers look to earn their fees, by providing a steady hand on the tiller. A month earlier, David Lamb, investment committee chairman of St James’s Place, had argued in his annual report that for investors the “daily ebb and flow of global markets should hold much less fear”. He added: “Our advice is, and always has been, to ignore the inevitable noise that surrounds such bouts of short-term volatility.”
In the event, the heavens did not fall. Better-than-expected economic conditions helped the FTSE All-Share index to deliver a full-year total return of 17 per cent in 2016, while the S&P 500 posted a healthy 12 per cent.
Defenders of wealth management argue that the longer-term value of such advice and spotting investment opportunities when markets tank justify a premium price tag.
The average all-in fee charged by the UK’s wealth managers is approximately 2.24 per cent, according to stockbroker Numis Securities, though some managers’ charges vary depending on the length of time that the assets are managed. This all-in fee will include advice, fund management and other custody and administrative charges.
There are grounds to believe this level will not be sustained, however.
Wealth managers are feeling downward pressure on their fee margins from the rise of lower-cost passive investment, low interest rates and demands for greater industry transparency over what exactly clients are paying.
Europe’s Mifid II regulation, which comes into effect next year, will include the latest in a series of rules designed to give investors a better picture of their charges.
“The industry is having to disclose its fees more often and more clearly than it used to,” says David Carroll, head of strategy at UK wealth manager Seven Investment Management.
More regular communication, coupled with the rise of passively managed investment strategies, which are generally cheaper than actively managed counterparts, encourages Carroll to predict that investor fees will continue to fall.
Jonathan Goslin, an analyst at Numis who covers the UK’s listed wealth managers, agrees. “It is the rise of passive but also the lower-return market environment,” he says. In a low-rate world, that 2 per cent charge can take quite a chunk out of the overall portfolio return and prove more difficult to defend when there are other easily comparable options.
Regulators have also pushed managers towards more transparent fee structures that are closely related to the level of assets invested. Rathbone Brothers is a typical example, launching a new rate card for clients two years ago that removed trading commissions and instead charged a discretionary management fee, tiered according to the amount of assets invested.
But this is not necessarily the end-point desired by high-net worth individuals. The World Wealth Report 2016, authored by business consultancy Capgemini, found that 28 per cent of high net-worth individuals would like to be charged according to investment performance. Currently just 18 per cent are charged in that way. Another 24 per cent said they would ideally like to pay fees linked to the level of assets managed. At present 30 per cent are charged like this.
Each region has idiosyncratic challenges, too.
The Swiss private banks used to be able to charge a premium as local banking rules allowed for greater secrecy over invested assets. The introduction of the “automatic exchange of information” procedure will now mean that client information is periodically shared with partnering countries. Cross-border outflows dented wealth management revenues for investment banking group UBS in 2016. Peer Credit Suisse described years of “significant structural pressure” from tax regularisation and regulatory change.
But wealth management charges need to be put in perspective for the larger banking groups, which are able to offer wealthy clients other commercial and investment banking services.
Globally speaking, better understanding may lead to greater pressure on the layers of charges - including advice, fund management and custody. The wealth houses can exert pressure on external fund managers to lower the cost of investment, but demonstrating “value for money” on the advice layer is difficult, says Michelle McGrade, chief investment officer of retail broker TD Direct Investing. “As an adviser, the best thing may be to say, ‘Stay as you are.’ “
Short of a move towards performance-based fees, expect more focus on what is known as “value-add” - which could mean parallel services such as retirement or inheritance planning.
