SJP and HL not alone in wiping vast sums off saving pots via fees

Advised client invested via a DFM could lose 70% in fees from their initial sum

St James’s Place (SJP) and Hargreaves Lansdown are not alone in swiping vast sums from savings pots with the average advised investor losing upwards of 58% off their initial sum once various intermediary fees have been taken into account.

SJP came under fire in The Sunday Times for charging clients almost a £1m in fees to look after £1m worth of savings over a 20-year period. A Hargreaves client would lose £643,728 over the same period.

However, Graham Bentley, managing director at GBI2, says while the data is focused on SJP, it could easily be applied to the wider advice market.

Bentley uses a hypothetical £1m investment in the average multi-asset 40-85% equity fund with annual returns of 4.5% to make his point.

He says: “Applying both a 1% advice fee together with the platform fee, the ‘lost’ return is a whopping £583,000.

“Adding in DFM fees of 30bps including VAT slashes the £2.453m return to only £1.795m, ie a ‘lost’ return of almost £700,000. If you apply an initial advice fee, this clearly exacerbates the costs further.”

Looking at Hargreaves Lansdown, Finalytiq founder Abraham Okusanya says its 1% advice fee is similar to what a lot of the adviser firms he works with charge. “Whether HL is on par would depend on what services this covered.”

Value for money needs to be extended

The findings have prompted some in the industry to suggest the FCA value for money changes coming into effect from 30 September be extended beyond fund managers to other parts of the investment industry.

“The value for money assessment needs to also apply to platforms and advice, as excessive charges are arguably more prevalent here than in the world of investment funds,” says Justin Modray, owner of Candid Financial Advice, which conducted the research for The Sunday Times.

As it stands, very few financial advisers are focused on cutting costs for clients, says Modray.

“The typical 1% annual advice fee has effectively doubled since the FCA scraped commissions at the end of 2012,” Modray says. “And yet the proportion of advisers outsourcing investment advice to funds of funds and discretionary services appears to be on the increase, suggesting advisers are generally earning more for doing less.

“And it’s their clients who end up paying the price, via higher charges.”

But Red Circle Financial Planning chartered financial planner Darren Cooke reckons problems in the chain lie elsewhere.

Cooke reckons there will be increasing questions over the value and cost of each piece of the advice and investment chain, although he describes platforms as “quite cheap and in general profit margins are not huge”.

“The biggest cost, the biggest profit margins, and you could argue they take value not add it, is fund managers when you compare them to a low cost passive option.”

Flat fees are good value compared to ad valorem

Bentley reckons everyone in the value chain should have to demonstrate how the customer benefited from the cost versus the position they would have been in had they not received the service.

He says: “I think financial planners, ie planning rather than investment management being their core activity, can more easily demonstrate their worth if they charge flat/hourly fees, than if they charge ad valorem.”

Langcat director Mike Barrett points out advisers must already consider the total cost of any recommendation they are making to ensure it is of value under COBS guidance 6.1a.16.

The FCA has not pointed to any value for money assessment within the recent platform market study final report or in advance of its suitability of advice review, Barrett adds.

Is SJP value for money?

Cooke is sceptical about SJP’s claim that its investment management justifies its fees, but he agrees an IFA using a DFM will be similar on costs.

Likewise, Bentley says of SJP: “Their investment performance is generally poor, and this has focused everyone’s attention on the ‘value’ they provide. Stories of apparent poor-quality advice accentuates these costs.”

However, SJP makes money through all points of a generally expensive value chain, such as fund charges, advice and platform fees, he says, adding that applying the same calculations to the wider advice market produces “no less shocking results despite generally higher returns”.

“It’s just that the money sucked out of the client’s pot is going to separate providers of advice, platform administration and portfolio management, rather than a single entity.”

A spokesperson for SJP says: “Independent research by Grant Thornton shows that St. James’s Place has competitive fees compared to other fully advised wealth management services in the UK. Furthermore, over all rolling five year periods since our portfolios were created in 2011, they have outperformed their relevant benchmark 84% of the time.”

Public needs to vote with their wallets

Modray says the situation won’t change until the “public starts voting with their wallets” and that won’t happen until there’s a much wider understanding about the cost of advice.

“As a starting point the FCA should require all advisers to openly disclose their costs, with standardised examples, on their websites.”

Martin Bamford, managing director at Informed Choice, says keeping costs low is one of the key-drivers of long-term investment success. Poor financial education in the UK contributes to consumers having little understanding of what constitutes good value for money, Bamford says.

However, he still thinks higher-cost brands have a role. “SJP has a premium brand, with premium prices accordingly.”

He says: “Whether it’s the charges levied by SJP or Hargreaves Lansdown, there will always be a lower cost option for investors to consider. Whether or not that lower cost option represents better value for money is a judgement call for individual investors to take.”

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