Where do you go if you want someone to help you out with your money? If you need pension advice? Insurance? If you want your Isa taken out of your hands? Or if you just want someone else to take your cash and sort it all out?
Should you go to an independent financial adviser (IFA), a private banker, a stockbroker, a private client discretionary manager, or perhaps a wealth manager? And what exactly is it that all those different people do? My guess is that the vast majority of people haven’t got the faintest idea. If so, this article is for you.
Part of the problem here is that the terms are endlessly mixed up and misused, and that there is considerable crossover in the qualifications people have. But there is still a clear division we can make.
Financial advisers advise. They can give you advice on everything from pensions to investments to insurance, but they cannot make decisions on your behalf. They advise, you decide.
A stockbroker also advises only, just about the buying and selling of stocks.
A private banker is in general just an upmarket version of an IFA. If you were to use words properly, he would just be a person who took deposits from some well-off people and lent it (with a little money multiplier, of course) out to other well-off people. But the phrase is now shorthand for someone who works at a branded financial institution and gives rich people advice on how to handle their finances.
A discretionary manager is a different thing altogether. You might find them attached to IFA firms, and you will almost always find them attached one way or another to private bankers. But the clue to their difference is in the word ‘discretion’.
Use one, and you won’t get advice on pensions and insurance; you’ll only get investment management. You only make the first decision (giving them your money). After that you give them the discretion to manage your money as they see fit within whatever parameters you set them on day one.
Regular readers might think I rather disapprove of this – I am after all a great advocate of DIY investing. But I don’t. The more investors of all ages I talk to, the more I realise that most people don’t really want to have much to do with the whole business.
They don’t think of it as an exciting hobby, they think of it as being an unpleasant mixture of the boring and terrifying. They really wish someone else would do it for them, and that’s where the problem comes in.
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Anyone can see an IFA, or get enough help online to do their investing themselves. But not everyone can have a discretionary manager. Go back to the very beginning of the business in the early 1960s and you can see why.
This kind of management, wrote journalist Robert Jones at the time, was designed to “tailor a portfolio to a client’s specific needs to secure the most favourable tax treatment for his income to provide for his retirement and perhaps his children’s education and to take the degree of risk which the client’s resources and temperament indicate is desirable”.
This was originally designed as an expensive service for the well-off – and that’s exactly what it still is.
Most discretionary managers will only take on clients who come to them with many hundreds of thousands of pounds. And they still charge an awful lot. Discretionary management effectively evolved from high-end stockbroking.
So, in the beginning there was rarely an explicit charge: everyone made their money from commissions, which in those days were fixed and high.
There was a brief fad in the 1960s for ‘investment counsellors’, who farmed out the trading and took 25% of any profits they made as fees. However, as commission levels fell, the brokers increasingly took on the US approach of charging a percentage of the assets handed over to them instead.
At the time, that percentage came in at around 0.5%. Today, it has crept up to more like 1%. And it doesn’t end there. Add in all the other charges and you’ll end up paying more like 2%.
Good ones will be a bit less, but go with some of the worst offenders in the market (I’d put Coutts, Towry and St James’s Place in that category) and you will often find yourself saying goodbye to rather more. It’s too much – particularly given that performance comparisons aren’t that easy to come by.
This is all rather strange when you consider that every other part of the financial services industry is being disrupted. Crowdfunding and P2P lending are taking business from the banks and competition is forcing down fund and platform charges across the board. So why isn’t there a flood of online alternatives to wealth management?
A survey from Pershing (a big custodian) recently showed that some 80% of investors were unhappy with the current pricing model and 34% of people in the 45-59 age group had a “strong preference” for fixed rather than percentage-based fees.
There has been some action. Companies such as Nutmeg and Money on Toast have sprouted up. But MoT still charges 1%. Why go there when for the same price you could have a real person manage your money and buy you lunch at Christmas?
Nutmeg is more promising – its fees start at 1%, but if you have £100,000 to give them, that falls to 0.6% and half a million gets it down to 0.3%.