Wealth management needs a digital upgrade
Today you can buy items instantly via an Amazon Dash button, you can switch to new credit card in eight minutes and book a holiday in 10 minutes. Times are changing, and companies need to change with them in order to survive and thrive. Customers are demanding real-time access at their fingertips, literally.
There are numerous examples of companies and industries that failed to respond to new technologies and opportunities, as well as consumer demand. Think Blockbuster, Kodak, HMV.
Wealth management is ripe for disruption
Next in line and ripe for disruption is, arguably, the wealth management sector. It has been slow to adapt to a range of new opportunities and potential issues: mass consumer adoption of technology, the shift from active to passive investing, demographic changes and increased regulatory scrutiny, particularly around performance and costs.
While it has been plodding along, new innovative providers have emerged, offering online investment solutions at a fraction of the cost, so-called ‘robo-advice’.
Personally, I don’t believe ‘robo-advice’ is the right term for these offerings, many of which still have a very human element to the investment decision making process. What many online investment, model portfolio providers offer is a solution to a very real problem.
Cash savings eroded by inflation
People increasingly have to provide for their own retirement or save extortionate amounts to get on housing ladder. The low interest rate environment means that the value of any cash savings gets eaten away by inflation – what’s called negative real returns. And if they opt for actively managed funds they suffer from high fees eating into these hard-saved investment pots.
Fee transparency in the wealth management industry has come under increased scrutiny. Since the Retail Distribution Review (RDR) in 2013, Financial Advice Market Review (FAMR) in 2016 and with the rise of passive investing, there has been some downward pressure on fees, but the cost of traditional wealth management has been slow to change, and sits well north of 2 per cent a year.
Consumers need to be cost conscious and apply this to all elements of their lives, including investments. In its interim report on the asset management industry, the Financial Conduct Authority (FCA) found that over three quarters (77 per cent) of non-advised retail investors look at charges when making investment decisions. In the same report, the FCA highlighted called for greater clarity on fees.
Wealth managers need to be more transparent
Many wealth management providers fall short when it comes to transparency on fees, leaving investors in the dark about the true cost of investing and the impact it will have on their returns. The issue here is that many investors might think they are getting a good deal on fees, but in fact are being blindsided by hidden charges and a lack of clarity on the total costs of investing. They could be getting unwittingly stung by opaque custody fees, platform fees, fund fees, and as these will come directly out of their investment pot, they may not even realise it.
Watch out for hidden charges
The best way for investors to understand the cost of their investments is to look at the total cost of ownership (TCO) – this can be exceptionally hard to work out, even for the most sophisticated investors. Hidden charges materially eat into investment returns and it is crucial that providers are transparent about all fees upfront, so that investors know the exact costs they will incur.
By saving money on fees, a greater portion of an investor’s returns can be reinvested, generating further earnings, through ‘compounding’. This can have a significant impact on the value of an investment portfolio over the long term and could, for example, be the difference between being able to pay to send your children to university and not being able to do so.
As an example, a one-off investment of £100,000 would have a TCO of £2,560 per annum with the average UK wealth manager (according to Grant Thornton). In an online investment model portfolio, using the IG Smart Portfolio costs , this would be £750, a saving of £1,810 per annum. Assuming these portfolios both achieve the same annual returns of 6 per cent, due to the savings and compounded returns over time, an investor would have saved £50,000 on fees over 15 years and £200,000 over 30 years.
With figures such as this, it is hard to ignore the impact of fees. If the traditional wealth management industry doesn’t adapt quickly, and improve the consumer experience in terms of fairness and transparency, it will not be the first industry to lose out to tech-savvy competitors.