Chris Gilchrist: Wealth management lipstick on a pig
Financial advisers seeking to impress prospective clients have started to describe themselves as wealth managers. Like many fads in the advice business, this is probably relatively harmless but it does bring to mind the Russian proverb about putting lipstick on a pig.
The truth is that wealth management for really wealthy people has been and always will be under- taken by banks. The reason is simple: really wealthy people always have a lot of cash on deposit.
Even if the bank pays them a decent deposit rate, it makes so much from the interest margin on lending that any fees it charges the client are small change. And guess what? They do not actually charge that much in fees - at least not on an ongoing basis.
The number one rule in wealth management as undertaken by banks is - do whatever it takes to keep the client happy and his money on deposit. And the really rich, who do not often become that rich by being stupid, are usually quite capable of wringing fee concessions out of banks for the services they do buy.
The really rich prefer, as they always have, to pay fees on a transactional basis. Banks typically build those fees into the structured products - often bespoke ones - they create for such clients. If their clients did not like this, it would not have required the retail distribution review and all its fee disclosure rules to get them to go somewhere else to get a better deal.
So if IFAs think that by disclosing their “wealth management” fees they will win the admiration and loyalty of the really rich, they should go into the rose-tinted spectacle business.
The bank wealth managers do not have to be independent or whole of market. I doubt they or most of their fat-cat clients give a toss about all that stuff. After all, we all know the rules never really apply to the stinking rich. If you think that is true only in the third world, you have not yet grasped the fact that the City of London is the world’s biggest tax avoidance centre.
The avoidance is contracted out to the sterling offshore centres, which hoover up money and send it to London.
The world of the really rich is far removed from that of UK advisers, bound by UK tax law, constrained by money laundering and shackled by the FSA. If you were stinking rich, why would you want someone in that position to manage your wealth?
No, it would be a big bank with subsidiaries all over the place and the ability to do all kinds of clever things that only banks can do to magically transform money from one form into another.
Of course, there are rich people in the UK who are constrained by UK tax laws - but once they are rich enough they usually find it better for their health to live somewhere else.
This is all by the by. Many of the IFAs calling themselves wealth managers are just trying to justify large fee bills that, oddly enough, are similar to the commission they were taking until recently. I really do think pigs look better without lipstick.
Chris Gilchrist is the joint author of The Process of Financial Planning and editor of The IRS Report
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