Fees deal a blow to fairness

A recent analysis of private client wealth managers following the Financial Times wealth management survey, issued in June, has forced me to raise the topic of dealing fees again. Why? Because they make me angry! They create bias and you need a degree in maths (or be a spreadsheet genius) to understand their impact on your portfolio.

The Retail Distribution Review, which came into force on 1 January 2013, abolished commission payments from product providers and introduced 'adviser charging', where the financial planner must agree their fees directly with the client.

The legislation aimed to eliminate the bias that commission caused and to improve transparency so consumers could compare the costs of firms. Why it took quite so long for the regulators to realise that if one product offered a salesperson 7 per cent commission and another product only 3 per cent, they might be biased towards the highest paying product is totally beyond me! Better late than never.

Our business operates a transparent fee structure. For example, on a £1m portfolio, we charge 1 per cent per annum. This fee includes full discretionary investment management, financial planning (including cashflow forecasting) and tax planning. The only 'bias' that we have is to manage the portfolio in such a way to ensure that we add value. At the end of every year, we meet our clients and if they are not entirely happy, they can have a full refund of all fees. Transparent? Yes. Bias eliminated? Yes. Client in control? Yes.

Surprising results

The FT Money Guide: Private Client Wealth Management compared 47 firms and analysed, among other things, performance, asset allocation and charges. When I reviewed the charges of these firms for a £1m portfolio, they varied between 0.25 per cent per annum and 1.5 per cent per annum. The difference was surprising.

I delved a little deeper, taking particular notice of dealing fees. There was no standard approach. One firm charged £50 on the first £500 (10 per cent), then 1.65 per cent on the next £9,500. Another company charged £20 for each sale and purchase regardless of transaction size, yet another business charged 0.85 per cent on the first £10,000 then 0.4 per cent after that.

Trying to work out what equates to the total fee is virtually impossible and makes comparisons extremely difficult. To my mind, that blows transparency right out of the water. So I asked one of our financial analysts (a spreadsheet genius) to take a look. I found the results shocking. The outcome was that, where charged, dealing fees would at least double the cost to the client. In fact, for the only manager that would offer a flat-rate option as well as an alternative to dealing fees, that is exactly what happened.

When you took into account the dealing costs, what appeared to be the cheapest two firms on face value actually became the most expensive. OK, I accept these findings are based on what can be moveable assumptions, i.e. the number of 'deals' that take place, but that is the point. There is no way of accurately knowing what the total cost will be. I would need to know lots more details. What's the trading frequency? Are fees charged for both a buy and a sale? What is the average transaction size? Are trades aggregated, or per line of stock? Just the last point alone can triple fees.

There is no doubt that bias exists. If I am paid money every time I press a button, am I not more likely to press that button?

When I meet clients for the first time and we look at their existing portfolio, many are not even aware that they are paying dealing fees in addition to an annual charge, and believe that the total cost is simply the lower per cent-based fee.

I wish that the industry would eliminate bias entirely and simplify charges across the board without waiting years for the regulator to catch up and enforce another change.

Colin Lawson is founder and managing partner of Equilibrium Asset Management

He writes a regular blog on wealth management for Private Client Adviser

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