Over time investment fees can dramatically eat into returns. This becomes all the more true when individuals within the same family are each paying high levels of annual fees, which is the most typical current scenario.
By contrast, using a more cost effective wealth management service can provide savers with dramatically different results, for example earning as much as an extra 10 years of additional retirement income, according to recent research by the new discretionary wealth manager, Netwealth.
There is pressure from the Financial Conduct Authority (FCA) for the asset management industry to change. In its recent study of the asset management market the regulator found that “retail investors do not appear to benefit from economies of scale”. Instead, the economies of scale are biased solely towards the fund managers themselves.
What if family members or friends could reduce investment fees by pooling their savings together in a network, and still invest as individuals?
Pool assets but keep individual savings goals
Different generations typically have significantly different financial needs and resources. Savers in their 40s and 50s often have more responsibilities and dependents. They are likely to have children who are teenagers or in their early 20s and may be paying school or university fees, as well as planning for their future retirement. They may also be supporting elderly parents or ex-spouses.
Older investors may have substantial savings and be focused on generating a retirement income, as well as thinking about how to pass on an inheritance. The younger generation may be saving towards a deposit for a property and only able to contribute relatively small amounts.
A service that would allow families to pool their resources whilst still allowing each individual to invest according to their own needs would make perfect sense. Yet, no traditional wealth manager currently offers this service.
This may be because they are then able to charge their clients more, said Henry Tapper, director at First Actuarial and founder of the Pension Playpen blog. “Advisers prefer individual fees, because there’s an awful lot more in it for them,” he said.
A network of savers
Investors who seek to cut fees by pooling assets are excited by a new approach offered by Netwealth. This allows clients to create a network of up to eight savers, where fees for everyone are based on the combined assets and not on each individual account. Aggregating assets helps to drive down annual fees, whilst each member of the network can still pursue the financial goals that best suit their age and requirements.
For instance, if Mary opens a Netwealth account with £250,000, she would pay an annual fee of 0.75% – already far lower than the average UK wealth manager's charge. If she then invites her husband and her parent to the network and they add an ISA of £75,000 and a SIPP pension of £175,000 respectively, the fees would drop to a reduced annual fee level of 0.60%.
Mary’s son could also be added to the network and open an ISA for £5,000, yet still pay the same 0.60% as the rest of the network. He could also add to his savings from as little as £100 a month.
How the fees compare with a traditional wealth manager
In the example above, the family network is paying Netwealth a fee of 0.35%, where the only additional charge is on the underlying funds in the portfolio which should be no more than 0.25%. This brings the all-in annual charges to 0.60%.
If the same family invested individually via a traditional wealth manager, Mary and her husband would each pay an average fee of greater than 1.82%, according to research by Numis – more than three times the all-in charges at Netwealth. What’s more, as her son’s £5,000 falls well below the minimum investment threshold set by traditional private wealth managers, he would be unable to invest in this way at all.
In this example, the four would save a combined £5,000 in fees every year by investing with Netwealth compared to the average UK wealth manager. And by using the Netwealth Network, they can save a further £1,100 - bringing the total saving to more than £6,000 a year. The compound saving in fees over 10 years is more than £90,000.
This network offering is unique in the UK. No other provider currently offers a single aggregate fee level across family members and friends, while still allowing each individual account holder to pursue their own financial goals.
“Traditional wealth management tends not to cater for families in a way which is economically interesting, other than occasionally in the case of the ultra-high net worth” says Netwealth’s CEO, Charlotte Ransom. “Our clients can benefit from economies of scale with other family members or friends, whilst maintaining the flexibility to save in a way which suits their own individual requirements."
Tapper believes this model will prove popular: “There is a gap in the market to cater for individuals keen to get the benefits of investing as a [network],” he said.
Particularly in a low interest rate environment, the ability for family groups or close friends to drive costs down whilst still pursuing their own investment agenda should come as a unique and welcome change.
Past performance is not a reliable guide to future performance and investment projections shown in this proposal are not a guarantee of investment returns. You are advised to seek independent tax advice based upon your personal circumstances.
Average wealth manager fee is 1.82% - source = Numis Securities, Citywire Wealth Manager, February 2015 (http://citywire.co.uk/wealth-manager/news/discretionary-fees-laid-bare-let-the-calculations-begin/a799209).