“Everyone wants to know you when the market’s rising, but when it falls, you’re on your own”.
That’s the comment of one of my friends who’s been trying to talk with his wealth manager over the past week.
Right….that’s it people….let’s do it all again next week…..😱 pic.twitter.com/dCTAyjmras
— James Coney (@jimconey) March 6, 2020
But your wealth manager is still taking your money.
Advisory businesses these days are funded by your investments. The adviser is paid a percentage of the money you own and this is dressed up by the Latin phrase “ad valorem”. Ad valorem means “in proportion to the value” and advisers like to argue that they get paid in proportion to the value of the money they advise on.
Laughingly , this translates into another sophism, “alignment” which pretends that an adviser shares your pain. This may mean that in a bad year , a wealth manager doesn’t make such a big profit from your money, but it doesn’t mean that he or she shares your pain. You have less money, the wealth manager has less profit, but the wealth manager’s still making a profit.
Do not listen to arguments that those taking a fraction of your money every month are sharing your pain. In the ad valorem wealth management model, nobody’s sharing your pain but you.
Is pain really shared?
Historically, savings were managed not be advisers but by trustees. The trustees of pension schemes were not paid and were often part of the collective enterprise of a defined benefit pension scheme.
When something like Coronavirus came along, trustees could reassure the beneficiaries of the trust that everyone really was in it together. This “mutual” model has rather gone out of favour as the idea of the individual contract has taken hold.
Contract based savings plans, even when grouped as “group stakeholder- group personal or groups self-invested personal pension” have no real collectivity. Even the employers who pay vast sums into these plans have no rights to see the results of the investments. There are no trustees to share the pain, there are only “portals” through which savers can see their money rise and fall.
The contract based personal pension is the ultimate expression of the truth “nobody’s sharing your pain but you”.
Last year my investments earned more than I did, last week I lost what I earned form work last year. Is my pain shared – I don’t think so?
Where gain is shared – it’s not obvious how.
The timing of the FT/Boring Money campaign to make the charges on our investments clearer, could not be better.
The FT has now published reaction to this initiative and it includes reactions from a lot of people known to this blog- Mick McAteer, Ros Altmann and Ruston Smith for example. It also features the comments of many FT readers, either from social media or email to Holly Mackay and Jo Cumbo.
The upshot is that while savers take the risk, there are a whole load of intermediaries between you and your money who have shared your gains in the good years.
And this is perhaps the most important insight of the lot
“It is crazy in 2020 that charges are still so opaque,” said Ms Mackay on this week’s edition of the FT Money Show podcast. “If you’re a DIY investor, all of the information is available on websites — it takes a bit of digging, but you can do it. If on the other hand you want to see an adviser at some of the biggest advice brands in the UK, it is impossible to do a broad-brush online comparison of what you might expect to pay.”
Holly concluded that “it was ‘near impossible’ for an ordinary investor to work out how their retirement fund would be impacted by charges”
How can ordinary people measure the impact of charges?
Actually , it would be possible to measure the impact of charges on the outcomes of their savings. In fact this is what Independent Governance Committees are charged with doing.
It is quite possible for them to look at contract based policies and run them through a model that shows what someone would have received from a policy on a zero charge, the actual charge and a benchmark charge (say 0.75% pa). All that’s needed is access to zero charge indices which can be used to replicate fund strategies and a simulator that runs contribution histories against the model.
We can do it at AgeWage, and we have done it one million times, benchmarking achieved outcomes against what would have been achieved if charges had been different. If you have the right algorithm you can convert how you’ve done into a score which marks you against the average saver.
I have asked IGCs to do this kind of modelling on the funds they have oversight on, especially the default funds used by workplace pensions. Later this month I will see whether any of this modelling has actually been done (or is in plan for next year).
I am pleased to see that a number of insurers are now asking me to do simulations, based on the contribution histories of contract based savers. I hope that this will be the start of proper disclosures that will allow people to see the value earned for the money they’ve invested.
My hope is that by the end of 2020, we will have analysed 5 million AgeWage scores and that the owners of those 5m pots can have access to a value for money score.
Along with the work of Ruston Smith, Mick McAteer, Ros Altmann and Jo Cumbo , we may be able to answer Holly Mackay’s question!
Is nobody sharing your pain but you?
There are times when we feel blessed and times when we don’t. We are currently facing a pandemic that threatens our health, our freedom of movement and our wealth.
It’s time that we worked out who we can share our pain with. Clearly many people shared their pain
Ms Mackay’s column in FT Money last week revealed how she was recently contacted by someone paying nearly £28,000 a year in fees on his £1m pension pot and £100,000 Isa.
He asked her: “Am I being rinsed?”
FT readers on Twitter responded with a resounding “yes”. “
For £28,000 a year I’d want to know what my full-time adviser employee was doing all day,” said Brian Brown.
Nic Round, who Tweets as @thewealthcoach, replied: “How many years has this been going on? Just imagine what the value of investments would be if this investor paid more attention years ago. The lesson is for all investors to wake up to what’s happening. Be curious. Be interested.
What the FT and Holly Mackay’s Boring Money is doing is helping the curious, become interested.
I totally support their campaign and will look for ways in weeks to come to help readers of this blog to find out the value they are getting for their money.
In the meantime, the FT is inviting you to contact them, and I urge you to do so.
Firstly, I agree that paying £28,000 in overall charges on £1.1mn is really very high. However, unless it is a vertically integrated “wealth manager”, it is important to realise that independent financial advisers and their firms do not receive that amount themselves. Unless you have the mysterious SJP exemption/free pass to not fully disclose separate charges for separate parts of the “wealth management” process, all other advisers break down the costs and charges paid by clients. Mifid2 means advisers must estimate the cost in pounds of separate charges such as platform fees, dfm fees, fund charges and adviser charges. So an ifa manager in a non-integrated firm would not be receiving £28,000, and such a firm would possibly start making a loss rather than a profit when markets fall this considerably. I do not dispute the thrust of the argument that the client suffers more than the adviser in falling markets. But the client gains more than the adviser in rising markets. I instinctively prefer the principle of time costed charging for advice. Funnily enough though, when I used to advise and offered the alternative of fixed fees, time costed or ad valorem, 95 out of 100 customers chose ad valorem charging. Don’t let the truth of that get in the way of a good story though….