The advice giant’s fees should be judged on fair pricing and value, not on oversimplified price comparisons
Much has been made lately about an investigation into the charges levied by St. James’s Place. In July Money Marketing’s own Justin Cash weighed in with a blog regarding analysis quoted in the Sunday Times. Justin’s opening gambit was that “…the way the maths is done doesn’t add up for me.”
Nor me, but for different reasons. I’m no apologist for SJP – and to be clear I have no professional or personal connection with that business, but I take issue with the belief that SJP’s fees were “far higher… than its best-known-rivals,” as the Sunday Times puts it.
Every advice business in the UK is a ‘rival’ to SJP, well-known or otherwise. Independence is at the heart of that rivalry. But that argument should also be about fair pricing, and value. There is a ripple, if not a wave of adviser businesses moving away from ad valorem fees, where a percentage of the capital employed is trousered, irrespective of the level or complexity of service being provided. There is a good reason for rejecting this model, which our recent research at gbi2 illustrates.
We ran our own analysis of an investment into SJP’s most popular investment solution, the Managed Funds Portfolio, and its current weighted OCF is 1.68 per cent per annum. To compare the impact of charges, one needs a common – and realistic – performance figure gross of fees.
We therefore used the 20-year return on the average Mixed Investment 40-85 per cent Shares fund, before that sector’s average OCF of 1.07 per cent. Over those decades, that sector has returned an average 5.85 per cent per annum before charges, rather less than the example used in the Sunday Times. But no surprise here – the industry does have a habit of exaggerating numbers to make a point.
Applying SJP’s 5 per cent initial charge to a £1m portfolio, and its ongoing OCF of 1.68 per cent (which covers all the costs, eg investment, platform and advice) results in a portfolio that would gain £1.15m over 20 years. When compared to simply buying the average fund directly, there is an opportunity cost – in effect, gains forsaken by going the SJP route. That cost is more than £165,000 over 10 years and a whopping £393,000 over 20 years. This translates as a reduction in gains of over 15 per cent at this historic growth rate.
The Sunday Times article compared SJP to Hargreaves Landsown’s advised business. Applying these calculations to other providers is not as straightforward as some calculators assume. On platform costs for example, tiered rates mean the percentage overall charge actually falls as assets grow. For example, Hargreaves’ fee is capped at £4,000 because there is a zero fee over £2m. Using a simple overall rate can therefore significantly overestimate platform costs. Our calculations illustrate Hargreaves’ advice service using the sector average returns has a total opportunity cost over 10 years of £116,000 – some £50,000 cheaper than SJP, and £61,000 cheaper over 20 years.
When looking at the wider competition, for example your business, SJP’s role as the industry’s bête noire is not quite as clear cut. There is an increasing number of advisers who are perfectly comfortable publishing their fee structure online, however they remain a minority.
Disappointingly, FCA data suggests 1 per cent initial and 1 per cent ongoing seems to remain the rule. I say disappointing because at this level, the costs of a typical adviser are higher than SJP, let alone Hargreaves. Using the Old Mutual Wealth platform and building a £1m portfolio producing returns aligned with our sector average results in an opportunity cost of £594,931 over 20 years, with a Rig of over 23 per cent.
Worse, when you add in the cost of a DFM at a lower-end 30bps including VAT, the opportunity cost is a staggering £710,000 over 20 years – a Rig of almost 28 per cent. So compared to the typical advice firm, SJP is cheaper, and Hargreaves advised business more so.
Now some readers will be telling me their performance record is better, and hence the Rig will fall assuming charges stay the same. I accept that. Indeed SJP’s Managed Fund Portfolio has returned almost 8 per cent pa since its launch according to our portfolio simulations – significantly outperforming the IA Mixed Investment sector averages since 2011.
However, these costs conflate financial planning and investment management. Many advisers will agree with me that value concerns the application of a price to financial planning advice. Financial planning does not require control of the client’s capital. Value for money comes in to the question – is the benefit commensurate with the fee being charged? Advisers may say the only arbiter of adviser value is the client, but the client may not understand the degree of work being performed or, for that matter, the scale of the benefit.
Some advisers may not publish their fee schedule prior to a client meeting, for fear of losing the client before they can make their case.
Perhaps an alternative is to provide two services – investment management and financial planning. The former is cursory, with little work performed, but ongoing. Asset allocation models are provided by platforms. Fund selection is borrowed from gatekeeper lists and freely-broadcast fund researchers’ lists. There is little quality evident, versus the thousands of other allocations purporting to represent the same risk profile. As for benefit, the same amount of work produces ten times the fee for ten times the capital employed. The cost of this service has to fall.
Whether flat-fee, retainer or ad valorem, on a £1m portfolio does an opportunity cost of almost £600,000 over 20 years make your financial planning and/or investment management services worthwhile? The 1 per cent model is dying, and not before time.
Graham Bentley is managing director of gbi2
You can follow him on Twitter @GrahamBentley