Traditional wealth managers do not always merit their high fees, says the City regulator. Computers could do just as well
Would you trust a computer to look after your investments? Nell Butler did and now saves thousands of pounds a year in charges. Butler had £180,000 invested with a traditional wealth manager that emphasises the value of face-to-face meetings with an adviser and funds managed by stock market experts. Last year she moved her money to Netwealth, one of a new breed of online advisers that largely use computers to decide how money is invested.
The switch has cut Butler’s annual bill for advice and investment fees by about £2,500. “I did not want someone in tweed looking after my money,” she said. “I was looking for a low-cost, efficient service. Netwealth has done really well for me this year in terms of returns.”
Butler, 50, a television producer, has joined the growing number of investors fed up with paying the high charges levied by typical fund managers, financial advisers and investment platforms.
They are turning to lower-cost alternatives — dubbed robo-advisers — that provide access to guidance and investments but allow customers to increase their returns as more of their money remains invested.
Such services were given a boost last week by the publication of a damning Financial Conduct Authority (FCA) report on the asset management industry, which controls about £7 trillion of investors’ cash — more than three times Britain’s annual gross domestic product.
The report, the result of an 18-month investigation, was highly critical of the lack of competition on pricing, particularly for “active asset management services” — humans, rather than computers.
Also, the City watchdog failed to find a clear relationship between charges and how well a fund performs. “Investors paying higher prices for funds, on average, achieve worse performance,” it said.
Spotlight on costs
The rise of cheaper alternatives is putting the asset management industry under growing pressure to justify its charges. New rivals include tracker funds, which simply follow a stock market or commodity index, and online services that use computer algorithms to create and manage portfolios for clients.
Baroness Altmann, a former pensions minister, said: “Clearly the new online platforms are disruptors. They are an example of an industry being changed by the introduction of new technology.
“Some people will always need to pay for advice on more complex issues. But if you just need a core portfolio of long- term investments, you might choose one of these platforms if it saves you a lot of money.”
The Investment Association, an industry representative, said: “Asset managers compete every day to attract clients and investors and are focused on delivering the best outcomes for them.”
The impact of charges
A small percentage difference in charges may sound insignificant, but it has a big impact over time.
Mark Polson of the Lang Cat, a financial services consultancy, said total costs with traditional wealth managers could easily be 2% to 3% a year, compared with 0.3% to 1.3% for online competitors.
“In the main, portfolios with a similar risk level — from a traditional service or a low-cost online service — will behave in a roughly similar fashion,” said Polson. “However, if you are starting from a lower cost base, the chance of achieving better returns is much higher.”
Say you had £100,000 invested and annual growth of 6%. With fees of 1% your pot would be worth £265,330 after 20 years, according to Candid Financial Advice, an independent adviser. If you paid fees of 2% a year, you would end up with about £40,000 less.
Team tactics: Nell Butler and Justin Rushbrooke with Martha, 17, and Remy, 11
How Butler and her family cut fees
Nell Butler was given money by her parents that was invested through St James’s Place (SJP), one of Britain’s largest wealth managers. It charged her about 2% a year in investment and advice fees.
By contrast, Netwealth’s fee and fund charges total 0.6% to 0.9%, according to how much is invested. The lowest figure applies if customers invest more than £500,000 through the platform.
The cost can be reduced by creating a “network” with friends and family, so the charge is based on the combined sum. Butler benefits from the lowest figure because her husband, Justin Rushbrooke, 52, a barrister, moved his self- invested personal pension (Sipp) to Netwealth. The couple also transferred the savings accounts of their children, Remy, 11, Martha, 17, and Thibault, 18.
This has shrunk the charges on Nell’s investments from about £3,600 a year with SJP to £1,080 with Netwealth.
SJP said: “People still value the trust and confidence that can only be provided by a personal, face-to-face relationship. Our [advisers] are committed to delivering a transparent, personalised service, and our annual client survey shows that 99% of all who responded say St James’s Place offers value for money.”
It’s not only robo-advisers that can help you save money. Anne Garbutt, 63, saves nearly £1,700 a year after transferring a £152,000 retirement pot from Hargreaves Lansdown, Britain’s largest traditional investment platform, to Alliance Trust Savings.
Although she did not move to a robo-adviser — Alliance Trust is a low-cost platform that does not offer advice — Garbutt has embraced cheaper fund alternatives. She has six trackers, which automatically mirror indices such as the FTSE 100.
Garbutt, from Hythe in Kent, paid Hargreaves Lansdown an annual platform fee of 0.45%, or £684. Her Sipp was invested in three funds with an average fee of 1.39%, adding another £2,113 a year. Her total annual bill came to £2,797.
She switched to Alliance Trust Savings in 2015 after seeking help from Candid Financial Advice. This cut her platform charge to £275 a year. She also switched to cheaper funds with an average fee of 0.55%, or £836. Her total annual cost is therefore £1,111 — a saving of £1,686. “The performance of my funds has been just as good as with Hargreaves Lansdown,” said Garbutt, an international development consultant. “I have also saved considerably on fees even with the added advice that I was not receiving with Hargreaves Lansdown.”
Charges “aren’t the whole story”, according to Hargreaves Lansdown. Clients also value its service, range of investment choices, mobile apps and average 20% discount on recommended funds, the firm said.
How do robo-advisers work?
Netwealth is part of the new wave of digital wealth managers. Others include Nutmeg, Moneyfarm, Wealthify, Scalable Capital and True Potential Investor.
New customers usually answer online questions about their financial goals and attitude to risk. The robo-adviser then suggests portfolios that it will manage for them. This can be done within minutes.
Typically, fees are kept low by investing in tracker funds or exchange-traded funds. Trackers are cheaper than actively managed funds because they do not pay professional fund managers to pick and choose where to invest. The FCA study found the average tracker charge is about 0.15% compared with about 0.85% for actively managed funds.
Investors paying higher prices for funds, on average, achieve worse performanceFinancial Conduct Authority
Holly Mackay of Boring Money, a personal finance website, said digital wealth managers “provide diversification at a decent price”.
She added: “They are good for people who have a niggling sense that interest rates are rubbish, and want someone to pick investments for them, rather than blending their own portfolio from 4,000-odd funds.”
Philippa Gee of Philippa Gee Wealth Management said: “Robo-advisers are a great way to get started if you have smaller sums to invest and don’t want to pay full fees for an adviser when you don’t need more complex advice.”
Many of the platforms also offer contact with human beings via online chat, phone and email. Netwealth offers face-to-face meetings at a cost of £125 an hour, with a minimum of two hours.
How much do I have to invest? Wealthify and Moneyfarm accept investments of as little as £1. True Potential Investor has a minimum of £50, while Nutmeg requires at least £500 plus £100 a month, or a £5,000 lump sum. Scalable Capital has a £10,000 minimum and Netwealth accepts only clients with £50,000 or more to invest.
What about performance? Critics of robo-advisers say investors may achieve lower returns compared with traditional advisers. However, analysis by The Sunday Times of digital wealth managers shows this is not always the case.
Four of the firms — Netwealth, Wealthify, Moneyfarm and Nutmeg — supplied us with one-year performance figures, after fees and fund charges, for portfolios with similar risk levels to the private-client indices created by Asset Risk Consultants (ARC), an independent investment research and consulting firm.
The ARC indices calculate the average returns, after fees, achieved by traditional investment managers such as Coutts, JP Morgan and Rathbones. These are known as benchmarks.
The Nutmeg, Wealthify and Moneyfarm portfolios generated very similar returns to the ARC indices, while Netwealth delivered growth that was noticeably higher than the benchmarks across all four risk profiles, from cautious (40% equities) to high risk (80% equities).
Polson at the Lang Cat sounded a note of caution about robo-advisers. He said that because they tend to use tracker funds, they do well when markets rise — as they have over the past 12 months — but investors may be more exposed to negative returns in trickier times because tracker funds also follow their markets downwards.
“They have not been around long enough to be tested by a major market crash,” said Polson.
Is my money safe? As with other institutions regulated by the Financial Conduct Authority, robo-advisers must keep clients’ money in “custodian” bank accounts, so it is shielded from creditors if the firm goes into administration.
Investments are also protected by the Financial Services Compensation Scheme, up to £50,000. This is not protection against losses made as a result of poor investment decisions, but rather the amount guaranteed by the government should the company holding the money go bust.