Fees: How Much Are You Paying?

Followers of the financial news will have seen that transparency has become a watchword across our profession and the financial services industry in general in recent times.

Casting our minds back a couple of years, everyone was preparing for the introduction of the MifiD II legislation. This was the second iteration of the EU’s Markets in Financial Instruments Directive. It aimed to increase protection for investors and was basically the EU’s legislative response to the financial crisis of 2008, seeking to restore confidence amongst investors. Greater transparency, particularly on costs and charges of investments and advisers, was a big part of it.

The roll out of MiFiD II has remained in the news since it officially came into force on 3rd January 2018, with supporters and detractors alike chipping in with their view on why it’s necessary or why it’s overly bureaucratic and costly respectively.

‘Misinforming, Mischarging, Overcharging…’

Earlier this summer, the House of Commons Work and Pensions Committee, a cross-party group of politicians, put out a report calling for greater transparency over pension costs. The Committee didn’t bother beating around the bush as they found pension providers guilty of “misinforming”, “mischarging” and “overcharging” savers as they tried to set aside funds for the future.

It generated a raft of findings and recommendations, which captured the headlines (up to £2 billion was being swindled from savers), shone a searchlight on the role of the Financial Conduct Authority (out of a total workforce of 3,700 staff, only 10 were assigned to tackling pension scams) and held pension practitioners firmly to account (recommending that legislators create a record of how readily asset managers respond to reasonable requests for information).

Stop Digging Your Heels In and Put Investors First

Sadly, the reason why this legislation is necessary and the drive for transparency still has the power to create headlines is that it’s still meeting with resistance. Sure, people are making the right noises and legislation is slowly being rolled out that compels practitioners to act in the best interests of their clients. But there are also those who are still dragging their feet, digging their heels in, and whatever other metaphor you want to use for not accepting that things have to change. It’s time to understand that our role is always to put customers, savers and investors first.

For example, have you looked at your pension statement recently? Could you tell me with certainty exactly what you’re paying in fees? Even if you had it in front of you, would you be confident that everything was right there and you had the number exactly right? I think you get my point. If you don’t know exactly what you’re paying, how can you know if you’re getting value for money or being overcharged?

Understanding the Direction of Travel

MiFiD II and the Work and Pensions Committee report are just two examples of when the importance of transparency in financial advice and services has hit the headlines. If you look at the broader sweep of the narrative, you’ll see it’s a clear direction of travel for our profession. This is the way things are going. These are the things that our clients want and expect to see us providing – the standards that they demand we set. And this is all absolutely right.

Disruption is Coming

At First Wealth, we are constantly seeking to reduce the fees for the services we provide our clients. What we provide our clients, even though I say so myself, is a significantly more comprehensive package than some of the bigger, household name financial advice and wealth management firms. It’s not just a standard vanilla advice offering. We have put years of experience and thought into our blend of lifestyle financial planning, wealth management, financial coaching and behavioural insight. Advice and management won’t succeed if our clients don’t also have the right mindset. We care about this and are always striving to improve our offering.

The old phrase ‘you get what you pay for’ doesn’t always apply in our world, where in many cases clients get product-led advice that’s expensive. We don’t need to insert layer after layer of mysterious charges between them and us to justify what we do, or create work that isn’t there. We are a lean and efficient organisation. We don’t have large overheads, flash conferences or countless personnel on the payroll, therefore our clients don’t have to pay for them.

There was an interesting and timely article in the FT last week (Wealth management could soon cost less than you’d think) flagging that as fees become more transparent, this disruption will lead to more competition and a potential price war that will break the cosy stranglehold of the bigger firms and drive prices down for end-consumers. It extolled the virtues of combining a truly clued-up approach to financial advice and wealth management with a scrutinous and competitive approach to fees, which is the combination that we have been crafting for many years.

Using St James’ Place and Brewin Dolphin as examples, the FT article referenced their fees which come in at 2.7% and 2.5% respectively. Compare that with First Wealth, we are at 1.55% (for a client with £1 million invested). Some basic maths shows you that on funds of £1 million, this sort of difference can save the client £10,000 a year in fees – enough for a fantastic summer holiday!

Following the Evidence

A few months back, I wrote about how and why we are embracing evidence-based investing. In short, it provides a structured and disciplined approach to portfolio construction that creates wealth by capturing the returns of the whole market, driving down costs and removing the emotional decision-making of a beat-the-market mindset.

This is an important part of the story and a crucial step in the journey we’ve been on. A transition towards evidence-based investing was a move away from how we had run the business up to that point. But as the benefits of this new approach became clearer to us it was obvious that it was the right thing to do for our clients. It would have been ten times easier for us to turn a tin ear to the rising volume of support and carry on doing things the way we always had, but this has never been the way we conduct ourselves.

I like to think that it shows us to be a firm which is always looking to keep a step or two ahead. We embrace change and worry about those firms who are kicking and screaming against any change that threatens their comfortable status quo. What have you got to hide, guys?

So, when the next story about fees and transparency pops up in the media, I hope you’ll think of it as another step along the right path for financial services. The key consideration for investors when choosing who they would like to provide them with financial advice and products is whether they want to be with someone who’s fighting every new recommendation, or someone who’s leading the charge.

This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.