We founded Netwealth in 2015 based on the belief that the wealth management industry is overdue a dramatic overhaul, with the first frontier that is ripe for change being fees.
At first glance, a saving such as 1 per cent per annum in fees may seem negligible; however, the impact of this over time can make a significant difference to the size of an investment pot.
For instance, our analysis shows that a 1 per cent cut in fees on a £500,000 medium risk investment portfolio with 5 per cent gross returns, could result in savings of over £80,000 after 10 years and nearly £240,000 after 20 years.
Take another example, this time looking at retirement income drawdown. Based on the same medium risk level and investment returns as before, a 1 per cent reduction in fees on a £500,000 portfolio, where a client is drawing £40,000 per annum, results in the pot lasting three years longer.
Potentially, that’s three more years of financing elderly care, post-retirement international travel or other similar life-defining events.
Ultimately, as a result of high fee levels across the traditional industry, savers are being significantly affected, resulting in their life’s aspirations taking longer to achieve, or being put on hold altogether.
If the negative impact of fees is so obvious, then it’s important to ask: what is keeping them high and how are they justified?
The reality is there are myriad reasons, but a frequent cause or ‘justification’ for higher fees is often unnecessary products and services, with a particularly common culprit being so-called bespoke portfolios.
UK wealth managers’ websites and glossy brochures tell clients they need a bespoke investment portfolio, designed around their individual needs and objectives, managed by a ‘personal investment manager’, to whom they have a direct line and who will meet with them regularly.
This approach doesn’t sound unreasonable. After all, everyone is unique and has their own specific financial goals and reasons for investing.
On closer inspection, however, this reasonableness is questionable.
While each client has different needs and may indeed require personalised financial advice, this doesn’t necessarily warrant a “bespoke” investment portfolio.
Most wealth management firms employ a central team of specialist investment managers with many years’ experience of investing to manage a “model” portfolio which will reflect the best thinking of these investment professionals.
Any “bespoke” advice that deviates from this core team is therefore, by definition, a move away from the firm’s best thinking, and, to add insult to injury, likely to have been made by a far less qualified financial adviser.
Bespoke portfolios, as a result, tend to underperform in comparison to their model counterparts.
Not only that, the cost to manage these portfolios is also often significantly higher – a cost funded through higher client fees.