Disillusionment with the traditional wealth management model when sorting out her own finances drove former banker Charlotte Ransom to set up Netwealth in early 2015.
Ransom had previously spent 25 years in banking, mostly at Goldman Sachs, first on the institutional side before moving to the private wealth business, where she gained a better understanding of the dynamics of the UK wealth management market.
On leaving the firm, with more time on her hands and money to invest, she started to explore the options for her savings – but didn’t like what she found.
“I didn’t want to manage my own money but was squeamish about the generic UK discretionary wealth management offering, which I thought was lacking in transparency, expensive, clunky and had no decent technology. It was not fit for purpose.”
This dislike of the traditional wealth management model sowed the seed to create a modern wealth management business that relied on technology to “address the issues that some more traditional services have”.
But don’t call Netwealth a robo-adviser.
“We’re a challenger – or modern – wealth manager,” says Ransom. “We’ve got all the traditional bits you’d expect but because we are technology-enhanced, it’s fit for today.”
To get the wheels in motion, Ransom teamed up with a former Goldman Sachs colleague, Thomas Salter, who latterly worked at JP Morgan. The pair wanted Netwealth to have the same characteristics of top wealth managers: a top team with proper experience; a robust approach to asset allocation; security of data and assets; and access to human advisers.
That last point is particularly important to Ransom as she believes firmly in the power of human advice. Netwealth clients cantake advice in two different ways: baked-in as annual advice, which costs a further 0.2% on top of the all-in fee; or as one-off advice charged by the hour, which most opt for.
“That works really well because most of us have periods in our lives where we want advice,” says Ransom. “Maybe you get divorced, have an inheritance or decide to retire. This momentous thing will happen where suddenly you want to sit with a professional adviser for several hours and have someone write a report on what you should do in these circumstances.”
Ransom explains that in the traditional wealth management model, the price typically includes advice on an annual basis.
Technology is a crucial part of the business. In fact, 40% of the staff are developers, and Ransom classes Netwealth as a fintech company. “We are more fin than tech but, in the end, it is technology that underpins the service,” she says.
Ransom believes being “technology-enhanced” allows the firm to undercut its rivals on pricing, claiming Netwealth is almost two-thirds the cost of a traditional provider.
For a portfolio managed on a discretionary basis, the total annual fee (management fee, underlying fund costs and trading costs) is 1% for sums of £50,000-£249,999; 0.85% for £250,000-£499,999; and 0.7% for £500,000 plus.
But Ransom says the “really exciting” part of the fee structure is that Netwealth Network allows clients to benefit from economies of scale by allowing a lead investor to add up to seven other people, usually family and friends, to their ‘network’. As the total amount invested between the network increases, the fees go down to the benefit of every network member, yet each individual’s portfolio is managed separately.
The idea was inspired by Ransom’s own situation. She explains: “I’m in the sandwich generation. I’ve got parents at one end who drawdown on their pensions and then I’ve got kids who are coming through university and at some point will end up getting a job and getting paid. I was thinking about both sets of people benefiting from economies of scale within a family.”
Under the network, the annual fee drops to 0.65% for total sums of £50,000-£249,999; 0.5% for £250,000-£499,999; and 0.35% for £500,000 plus. Ransom says about 70% of Netwealth’s clients are in networks.
Ringing the changes
Having a technology base and being relatively new to the market also gives Netwealth an edge, says Ransom, because it does not have legacy issues involving things like mergers, expensive buildings and costly infrastructure or “armies of people in operational administration seats”.
“We have people who come from other well-established names and they can’t get over how much better the experience from a client perspective is when they come here.
“The only thing they are not getting is wood-panelled rooms.” Indeed, Netwealth is based in reasonably modest offices on London’s Charlotte Street rather than in the City or Mayfair.
The bulk of Netwealth clients are in their 40s or 50s, which also distinguishes it from other players. The second-largest client cohort are in their 30s, followed by the 20s and then 60-plus. The average portfolio size, however, is in line with the industry average at about £400,000.
“That is a clear signal that we are supplying a service into that core UK wealth management demographic. Typically, they are people I would call ‘next generation’, so if the classic client is on average in their low 60s, we’re servicing the generation just below that.”
Does this mean there is more of an interest in ESG and ethical investing that is so often associated with younger generations?
“We talk about this quite a lot because wedon’t currently offer an ESG fund,” she says. “It’s something fund management is talking about more than their clients, and I think it suits people’s agendas to talk this up at the moment. This is something that is more on the radar for younger investors.”
Ransom says Netwealth approaches ESG and ethical investing in a slightly different way. Rather than picking stocks or using active funds, it invests only in passive funds.
“We’re not ever picking something that could be anti-ethical because we’re only working with indices,” she explains.
If people want to invest ethically outside of their Netwealth portfolio they can direct it to charities of their choice with the fees they are saving, she adds.
“It’s turning that whole discussion on its head, though it’s not perfect either. I worry about this whole discussion around ethical funds where I don’t think it’s necessarily providing the answer end investors are looking for.”
Ransom is also pleased by the fact that about 45% of the firm’s client base is female, compared with the wider industry figure reported to be around 23%. “It is important we can help female investors get themselves in a position to invest for their financial goals.”
Valuable advice
Accessing markets through passive funds and ETFs ensures high levels of diversification and keeps the cost of investing low, according to Ransom.
The firm has seven risk-rated model portfolios, with risk level seven being about 90% in equities. In April, the MPS became available on the Transact platform to tap into the IFA market.
“We’ve always believed in advice and we’ve got our own advisers but we’re never going to be a St James’s Place with thousands of advisers. We’ve been planning from the start to have a route to market for IFAs as well, but we needed to build our own proposition and get going, which is what we have done over the past three years.”
Asset allocation decisions are made by head of portfolio management Iain Barnes, who has worked at Schroders and UBS Asset Management, and Gerard Lyons, who is chief economic strategist and has stints at Chase Manhattan and Standard Chartered under his belt.
Portfolios are invested in cash and money markets, government bonds, including inflation-linked, corporate bonds, emerging market corporate and sovereign bonds, UK and global equities, and EM equities.
“Probably 90% of our returns will be driven by our strategic asset allocation, and we add to our strategic positions with what we call cyclical positions. These are there not to add alpha but to contain risk.”
Using cyclical positions in practice came in the run-up to the Brexit vote when the team reduced exposure to sterling, which proved a wise decision in hindsight.
“We had no idea what the outcome would be but we were worried the pound would take a bashing, which it did,” says Ransom.
In terms of the view on the UK now, Ransom says the team is very interested in domestic assets because they are unloved and trading on a relatively cheap basis. Europe, on the other hand, is much harder to call because the team agrees with the headline concerns over the continent’s difficulty weaning itself off quantitative easing.
There is no active exposure in portfolios, but that could change if there was an area or asset class the team felt was not appropriate for an ETF or passive vehicle. It also has no exposure to alternatives at the moment because, while finding them interesting, it does not find the case compelling enough.
“We think a lot about commodities, infrastructure and real estate but, for now, we haven’t felt any of those add extra value.”
