Is paying for a wealth manager simply burning cash?

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Photo by JP Valery on Unsplash

Give your money to someone to look after and you’ll have to pay for it, fact. It’s quite easy to work out how much when start investing, but have you ever thought about how much this would cost you over 10 years? Do you know what you’re being charged for? Is there a cheaper option? Let’s find out…

You may be paying too much

In a nutshell, over a decade the fees you pay are likely to cost you 10% to 25% of your initial investment. This is according to our case study of fees charged by 16 discretionary portfolio management (DFM) providers in the U.K.*

Because some managers have a minimum amount that you can invest with them, we have used a portfolio value of £500,000. This would mean fees of approximately £50,000 to £125,000 over 10 years. This may seem surprisingly large, but even more surprising is how fees could affect the portfolio value after 10 years.

In our case study, the amount that you could have ended up with varied by over £145,000 depending on the fees charged.

The important thing to note here is not that you would have paid £145,000 more in fees for some managers than others, but that the more you are charged in one period, the less you have available to invest over the next period. The effect of this accumulates over time and you end up with something that looks like this:

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Value of an investment portfolio of £500,000 over a 10-year period starting in December 2008. Performance is based on the ARC Balanced Asset GBP Index. Past performance is not a reliable indicator of future performance. *

Why the big difference in fees?

As you can see, fees will differ depending on whether you pick a service that is considered to have an in-person component. This means you will meet or have a personal phone call with your advisor at least once a year. You may want exactly that. But will a more personal service give you better performance? No-one can guarantee performance, so if a wealth manager states that they can definitely earn you more than anyone else, they’re lying. Period.

Take a look at how quickly your fees could add up:

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Management fees are usually the ‘headline’ fee quoted and may be included in the ongoing charge figure (OCF), generally quoted separately by wealth managers. The chart above shows the proportion of OCF that is made up of management fee and other charges for the managers considered in our case study. *

Beware entry fees

Entry fees are an up-front cost that is paid when you first enter an investment or when you add more money to your portfolio. Of the DFM providers considered, 3 charged entry fees.

To demonstrate the impact of this charge on your investment, let’s assume a charge of 5%.

If you invested £500,000, an initial charge of £25,000 would be taken. Therefore, only £475,000 of your money would be invested. Once invested, you would need a gain of 6% on your portfolio to get you back the £500,000 you handed over to your manager.

However, if you had invested without being charged an entry fee and still got a 6% return, you would end up with £530,000. This would make you £30,000 better off than if you had paid the entry charge. Needless to say, this can have quite an impact on your portfolio value over time, especially when you consider that some managers charge you an entry fee, or “initial advice fee” every time you top up your account.

So what should I do?

Consider what you really want from your wealth manager. What do you value? Is it the relationship, the trust, additional services or simply getting returns?

Once you know what you want, you can compare how much you are willing to pay versus how much you will be charged. And of course, watch out for hidden charges in the fine print.

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ikigai gives you digital private banking. Get your everyday banking and investments with a low cost, fixed fee structure. All combined in a simple, intuitive app.

Find out more:

With investing your capital is at risk. ikigai is not a bank.

The value of your portfolio with ikigai can go down as well as up and you may get back less than you invested. Returns are not guaranteed and any historical returns, expected returns , or probability projections referenced on our website may not reflect actual future performances. You should seek financial advice if you are unsure about investing.

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*All figures are based on a case study conducted by ikigai. The case study looked at the fees charged by 16 DFM providers in December 2019. The providers consisted of 10 online managers and 6 ‘in-person’ managers, where the average fees were taken for each category. The overall effect of fees on your investment portfolio over time will depend on the fees charged, any gains, losses or income on the portfolio and how much you have invested. The ARC Balanced Asset GBP Index has been used as the performance benchmark for the period beginning December 2008 and ending December 2018.

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ikigai is a trading name of Ikigai Invest Services Limited, a company registered in England and Wales (Company number: 12011662). Ikigai Invest Services Limited is registered with the Financial Conduct Authority (FCA) as an EMD Agent (reference number: 902740) of PayrNet Limited, an Electronic Money Institution authorised by the FCA (reference number: 900594) and is an appointed representative of WealthKernel (reference number: 723719) which is authorised and regulated by the FCA. ikigai is not a bank. Registered address: 16 Great Chapel Street, London, England, W1F 8FL.

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Simple, intuitive banking and wealth management services in one app https://ikigai.money/

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