An exposé by an anonymous ex-adviser for St James’s Place, the UK wealth manager, was published recently in the Times. The accounts of the lavish entertainments the company is said to have provided for the advisers who serve its clients are eye-opening.
We’re talking about luxury cruise liners and all-you-can-drink champagne, safaris in Zambia and stays in country house hotels where the car park contains more Bentleys and Ferraris than a classic car show.
St James’s Place responded in the newspaper to defend the methods it uses to reward the roughly 2,400 “partner practices” that deal with its clients. “It would be wrong to imply our recognition schemes are predicated on anything other than the quality of advice provided,” said its statement.
The anonymous interviewee, however, said, “I felt we were not advisers; we were sales people.”
An extravagance founded on high fees
The flashy perks offered to these advisers are the most eye-catching revelations. But really, we should ask why firms such as St James’s Place can afford such extravagant entertaining. We think the answer lies in their fees.
Fees are a subject close to our heart at Nutmeg, because we were founded to provide an alternative to what our founders saw as an inefficient and expensive wealth management industry. By building a technology platform from scratch and investing in transparent, low-cost exchange-traded funds (ETFs), we were able to offer a sophisticated, cost-effective investment service available to everyone, not only the traditional customers of wealth managers.
Our model means more of our customers’ money is invested, and less of it spent on charges. But how much impact do these savings have?
High fees sabotage returns in the long run
Fees are important because they add up over time to diminish customers’ wealth. An annual management fee of 2%, for example, may not sound like a lot, but actually this can have a huge effect on the value of your investments in the long run. It is in the interests of traditional wealth managers to be vague or coy about the impact of fees, but at Nutmeg we believe in full transparency, so we have run some data to show the difference it makes when costs are controlled.
James McManus, investment manager and head of ETF research here at Nutmeg, created three examples to see what difference it made to invest with an annual management fee of 1% rather than 2%. We assumed a gross rate of return of 6%, before fees, which approximately reflects our current expected annual return for a medium risk portfolio1.
Here’s what he found2:
‘The typical investor’ makes a £30,000 initial investment and contributes £200 a month for 20 years. If they pay an annual management fee of 2% a year, they will have £138,302 in their pot at the end. If they pay a 1% fee, their final pot would be worth £160,560.
That’s a difference of £22,258.
Another way to look at it is that the higher fee reduces the investment return by 27%.
‘The lump sum investor’ begins with an initial investment of £100,000 and makes no ongoing contributions for ten years. At a 2% fee, their final pot is worth £148,024. At 1%, it is worth £162,889.
That’s a difference of £14,865.
Here, the higher fee reduces the investment return by 24%.
‘The young professional setting up a pension’ makes a £5,000 initial investment and contributes £400 a month for 35 years. At a 2% fee, the final pot is worth £379,297. At 1%, it is worth £470,565.
That’s a difference of £91,268.
The higher fee would reduce the investment return by more than 30%.
The sad truth is that high fees are the norm
These examples have examined a simple, all-inclusive management fee of 2% a year as the costlier example, but in fact many clients of wealth managers pay more complex fees than that. At St James’s Place, for example, clients may pay an entry charge of 5% before their money is even invested3. Depending on their account, they may also pay an exit charge of as much as 6%4.
These practices are not trivial. St James’s Place is the largest discretionary investment manager in the UK with roughly 367,000 client accounts5.
Entry and exit charges mean the cost of investing with a traditional wealth manager rather than with a cost-efficient, digital firm such as Nutmeg could be even more ruinous on your finances than our examples suggest. Have a look at our fees here.
Where are the customers’ yachts?
In 1940, a stockbroker turned author named Fred Schwed published a book which, much like the Times’ article, sought to lift the lid on the excesses of an industry – in his case Wall Street. “Where are the customers’ yachts?” is the question asked by a visitor to New York who noticed that bankers and brokers had bought expensive boats with their salaries and bonuses, while few of their customers could afford to do the same.
Clients of St James’s Place might be asking a similar question after the recent exposé. Where are their Bentleys, where are their safaris?
- As of August 2019, Nutmeg risk level 6 portfolios had a projected annual return expectation of 6.02%. Nutmeg data.
- These figures were derived by compound fee calculations by the Nutmeg investment team.
- Private Asset Managers (PAM) Directory, 2019.
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Projections are never a perfect predictor of future performance, and are intended as an aid to decision making, not as a guarantee. Tax treatment depends on your individual circumstances and may be subject to change in the future.