Stuart Fowler: the tech threat to private client charging models

The total costs of investing for UK private clients are too high.

We have analysed firms’ charges across most different business models – an audit of existing arrangements forms part of our investment planning for all new clients – and observed a bunching of all-in costs, excluding trading, between 1.4% and 2% per annum, even for clients with multi-million pound portfolios.

I am excluding entry charges for either products or services which also widely apply. These costs have to be compared with mean expected portfolio real returns (at the typical risk level) of about 5% per annum and a risk premium of 4%.  

In an economy in which most core services have become vastly more sensitive to price competition, the investment industry is holding out. It is different because it is better able to rely on the ignorance, inertia or resignation of customers. Ignorance is supported by opaque charging methods. Inertia results from unwillingness to engage with financial matters and a preference for blind trust and dependency.

Resignation reflects scepticism about alternatives: they are all as bad as each other. In a marketplace dominated by ignorance, inertia and resignation, leakage of customers arises largely from opting out, or ‘do-it-yourself’. But this too has a barrier in the form of the time spent on the work laid off to agents. 

There seems to be a real sense among different firms – privately, at least – that they are skating on thinner ice. No one is expecting the ice to break suddenly or soon, but there is an acceptance that it will.

Post-RDR transparency

Why the change? The retail distribution review (RDR) mainly affects the components of all-in costs. Advisers have to command a fee but can better do so if they are seen to be cutting product costs, hence so many Damascene conversions to passive management by firms previously philosophically wedded to active.

Vertically integrated managers can maintain margins by shifting more to their own funds at the expense of open architecture.

But RDR also prompts conversations with all clients that would not otherwise have arisen and, as much as they try to keep them low-key (read their websites to see how they trivialise RDR), they disturb the inertia.

The asset-based fee model is redistributive: the largest clients subsidise the smallest, lowering the entry level and broadening the market segments a firm can profitably do business with.