The gradual disruption of the wealth management industry

Last week, wealth manager Charles Stanley sponsored a supplement published with some of the papers. It wasn't awful there was some stuff about the social and environmental impacts of investing, as well as the usual warnings about how important it is to get good financial advice and how if you want a "happy and fulfilled retirement" you'd be wise to get on the phone to Charles Stanley ASAP.

What there wasn't, however, was anything at all about how much you might expect to pay were you to sign up. Ask a wealth manager this and you'll usually be told there isn't one single number that can definitely be given to any one investor it depends on all sorts of things, from the size of the portfolio to the type of service required.

I tried asking for a price list at a David Lloyd health club this week. There isn't one, said the receptionist, who then said she couldn't give me any ballpark figures either. "You'll need to sit down with an adviser." This weird lack of transparency is not a particularly good look for health clubs. But it is a really bad one for wealth managers.

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Still, if you have a good look on the websites you can find more information than you used to. Brewin Dolphin offers 14 pages of charging info with some helpful worked examples if you have £500,000, for instance, and use its wealth management service, you will pay 2.4% a year. Rathbones' schedule of charges suggests that its management fees come to 1%, but there is no total comparable to the Brewin schedule that I can see.

The Charles Stanley website tells me: "Your investment manager will discuss in detail the fees and charges for your account and provide you with a charges sheet." Shades of David Lloyd there. The St James's Place website offers nothing although we know they tend to come out at the high end.

I'm sure that with a bit more effort I could provide you with a little more detail. But that's not really the point, is it? If you have a service to sell, being transparent about the price of that service seems like a good idea. Still, the upshot is that in the main, old-fashioned wealth management doesn't come cheap. It's going to cost you 3%-4% of your assets in year one (set-up costs) and upwards of 2% on an annual basis.

That sounds shocking. It is. It's 50% of the yield you will get if you are invested in the FTSE 100, for example. And if, as research group GMO suggests, the likely five-year return on developed-market equities is not much above zero (below zero for big US companies), it might be 100%-plus of your total returns. Look at it like that and you will think this just isn't sustainable.

You will now expect me to say that you must go DIY. I'm not going to.

Here's the thing: the services offered by a clued-up wealth manager have value. A good one will make sure your portfolio is properly diversified and adjust it to reflect your tax situation and the extent to which you require it to produce an income. They will shift it to reflect your personal views on sustainability. They will check to make sure your Isa and pensions allowances are used up; maximise the effective use of your capital gains allowance; do the sums on how much you can safely spend every year in retirement; and talk to you about how to finance your children's education.

If they are really good, they will also find a way to talk you gently out of shifting 10% of your cash out of their sensible selection of investments trusts into a mining stock someone told you about over dinner. Reassuring stuff. The downside, of course, is that if they aren't clued up (and lots aren't) you'll find you paid an awful lot for a pointless chat with a chap in a nice suit.

The problem with the price, however, is that if you are running an old-style business it is hard to get it down to anything that sounds reasonable. Take into account the costs of compliance, legal services, depositories, custodians, back-office staff, the actual wealth managers, an office that is nice enough for clients to have coffee in, buying in research, trading costs, and underlying charges on funds and only the wealth managers with serious economies of scale have much of a hope of getting below 2%.

Perhaps, then, we need to divide up the charges into the cost of having someone make your investing efficient (and friendly) and the cost of the actual investing. Here might be where a good few managers make their mistake. Investors may well be happy to pay for their tax and advice services. But given the stats on the matter, they may not want to pay for their active management.

Given that very few active managers outperform over time, it is hard to imagine many wealth managers do either. This brings me to the new entrant to this overpriced and underwhelming market place Schroders Personal Wealth, a joint venture by Lloyds and Schroders that opens to new investors in November.

SPW tells me that the total cost of investing with them when they open to the wider market will be around 1.7% (we won't be able to confirm that until then and 1.7% is less than the 1.9% seen on older internal documents by the FT). The cost of the service part of the offering, they say, will be about 0.65% percentage points of that.

The rest is the cost of the investing itself. These will be standardised portfolios of funds created by the investing staff, rather than your personal adviser. That 1.7% is moving in the right direction (and SPW tells me it will be transparent too, which, if true, will be nice) but the investing bit seems like it's going to be pretty pricey.

Might it then be better to give your money to managers who focus heavily on keeping this bit down: buying relatively low-cost funds and investment trusts (for which costs are falling) or, for the best cost-profile of all, only exchange traded funds (ETFs)? Go, for example, to newish wealth management company Netwealth (please note, I am a shareholder in and non-executive director of Netwealth). There you get only passive funds.

That means that for someone with £500,000, the annual all-in charge with much the same sort of advice mentioned above but without a nice lunch out with your manager at Christmas comes down to 0.85% (less if you take advice only occasionally).

With £250,000 it's 1.2% (0.8% without advice). Otherwise, if you can cope with less contact, and perhaps have less to invest, you can go to the likes of robo adviser Nutmeg and get a straightforward managed portfolio (you won't have to make any investment decisions, but they won't help you manage your individual taxes) for not much more than 1% on £100,000. At £250,000, that comes down to 0.77%. You can also buy bits of advice separately, which is a nice innovation.

This is not yet a fully disrupted industry. But it is finally moving in the right direction. More than you can say, perhaps, for health clubs.

This article was first published in the Financial Times