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Crack the code of advisers’ fees

Readers asked Money to clarify the costs of investing via the wealth manager St James’s Place

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WHAT is the most cost-effective way to obtain financial advice and make investments? It’s a question often posed by readers of Money, but the answer, it seems, is not nearly as simple as it should be.

Last month, The Sunday Times attempted to address the issue by asking some of Britain’s largest financial advisers to provide “indicative costs” for advice, after we revealed that only 11 of the top 100 publish their charges online. Some were more forthcoming than others.

At the time, St James’s Place (SJP), a FTSE 100 company and Britain’s largest financial adviser, with £55bn under management, declined to give details of its charging structure, saying Money was “not asking the right questions”.

SJP insisted charges could be determined only after a face-to-face meeting with a client to enable it to understand their needs and the work involved.

After the article appeared on August 9, SJP customers wrote to Money to express their frustration, saying more details were needed and asking us to investigate. Others said they would like more information to be available online so they could compare prices before having to commit to a meeting.

As a result, we invited SJP, which was co-founded in 1991 by Sir Mark Weinberg and now has nearly 500,000 clients, to explain how its charges work, which it was willing to do.

What readers say

The vast majority of SJP investors are entirely happy with the service (in a recent SJP survey of 47,500 clients, 98% said they would recommend the company). But some wanted more details. Readers who emailed us did not want to be identified, so we have used their initials.

BD, from Hampshire, said: “I use both Hargreaves Lansdown and St James’s Place and both are reputable organisations. Hargreaves Lansdown’s fee structure is very transparent, while St James’s Place’s is anything but.

“Whenever I have asked about its fees I don’t get simple answers, as its fees are incorporated in its unit cost pricing structure, so nothing is transparent. SJP prefers not to talk about fees but focuses on the quality of its investment advice and the personal service to clients.

“I would welcome a Sunday Times article about the St James’s Place ‘model’, for the benefit of existing and future clients.”

JL, who lives in Devon, said he had sent more than 20 emails to his SJP adviser seeking to understand the fees being charged, but he remains unsure. He said: “For some time now, I have maintained four separate investment portfolios with four different financial advisers, in order that I may make regular comparisons of performances and fees.

“I recently tried to get to the bottom of the fees and charges levied by each of the four advisers, and only St James’s Place has been difficult.”

DB, from London, said: “I have an excellent relationship with my SJP adviser, but I don’t understand the relationship between this adviser and St James’s Place. How much of my investment goes to paying the adviser?”

First, some background

The advice industry has undergone significant changes in the past three years in an attempt to make fees more transparent.

In December 2012, rules were introduced to make the retail investment market “work better for consumers”, in the words of the regulator, the Financial Conduct Authority.

Previously, an adviser could recommend a unit trust — a pooled investment managed by an expert called a fund manager — with an annual charge of, for example, 1.5% without having clearly to disclose how much of this will be paid to him or her.

Today, in most cases, these charges are broken down, so clients can see the 1.5% charge typically includes a 0.5% fee for the adviser, a 0.25% fee for the platform used to make the investment, and a 0.75% fee for the fund manager.

SJP has now started to break down its costs in this way. Many of its rivals did so soon after the rules were brought in.

In a note issued to clients in July, SJP said: “We are setting out the components of the charges we take to enable you to see more easily what the charges are and what they are for.

“There are regulations which govern the way in which some elements of the charges need to be displayed and explained, and this can make some of the detail appear more complicated — especially when you write it down in one place, as we are doing in this leaflet.”

For example, the SJP UK High Income fund, managed by the respected Neil Woodford, has an annual charge of 1.67%. This is broken down into a 0.87% fee paid to SJP (including administration and other costs); a 0.5% fee paid to the adviser; and a 0.3% fee paid to the fund manager.

The new cost-transparency disclosures affect Isa and unit trust investors.

The charges for pension and investment bond investors — who account for about 75% of SJP’s business — are not broken down in this way.

How does SJP operate?

SJP works with about 3,000 advisers, whom it calls “partners”, and a selection of what it calls “best in breed” fund managers to create 33 bespoke funds that are available only to SJP customers.

The advisers create a portfolio of funds for clients from this list of 33, based on the client’s needs and goals. They cannot recommend any of the 2,000 or so funds available on the open market.

The advisers are not “employed” or paid a salary by SJP, the firm says, but receive a fee from the ongoing annual charges for the products clients invest in. Andrew Humphries, marketing and communications director of SJP, said the advisers “have chosen to effectively align their business with St James’s Place”.

The adviser will typically receive 0.5% from the continuing annual charge. Charges for pension and investment bond customers are “comparable and possibly lower”, SJP said.

Many other advisers, including Hargreaves Lansdown, Chase de Vere and Towry, pay their advisers a salary that is not dependent on the number of products they sell. However, they do receive a bonus, which is partially influenced by sales.

How does SJP’s model benefit its clients?

By selecting leading fund managers and creating its range of bespoke funds, SJP says it is in a much better position to cater to the needs of clients. It said: “We’re only looking for best-in-breed, high-quality, active managers. We don’t want to populate our platform, as it were, with lots of mediocrity. That’s not what we’re about.

“Our business model is very different from those who are typically advising on the products and services of third-party manufacturers.”

SJP says there is added protection for its clients as the company remains ultimately responsible for the advice given. Humphries said: “If the advice is inappropriate, then we will put the client back in the place [they] would have been if the advice had been appropriate.”

SJP says its clients simply want to have one charge that covers all costs.

It said: “If you go to John Lewis and buy a television or a computer, you don’t ask for the breakdown of the costs to find out what the margin is that John Lewis makes versus the manufacturing costs and everything else.”

It added: “What you’ve got to do is to accept that the only way you can get into an SJP fund is by being a client.

“So therefore you have made that conscious decision that ‘I need financial advice, so I am prepared to pay for financial advice because I can see the benefit of financial advice’.

“If you wanted to be a do-it-yourself investor and . . . create your own portfolio, then obviously you wouldn’t be allowed, or be able to, buy SJP funds.”

How does SJP charge?

As with most advisers, the charges depend on what you are investing in and your personal circumstances. You normally pay an initial fee to determine your needs and receive recommendations.

For pensions and investment bonds (a kind of long-term insurance policy that holds a number of selected funds), there is an initial charge of between 2.5% and 4% on the amount being invested. So, on a £200,000 fund, this could be up to £8,000.

You then pay the ongoing annual charge, which depends on the SJP funds you are invested in. Normally this is 1.5% to 2% (which includes the typical 0.5% a year paid to the adviser, as explained already).

There is also an exit penalty for pension and investment bond clients of 6% of the total amount invested if you decide to switch to another investment platform. This declines by one percentage point a year until there is no exit charge after six years.

For Isa and unit trust investors, there is an initial charge of “up to” 5%, SJP said. The annual ongoing charges again depend on the funds chosen. There is no exit penalty.

How does it compare to its rivals?

Towry offers clients who receive advice a list of five different model portfolios, depending on their needs. The funds included in these portfolios are not exclusive to Towry — they are available to retail and institutional investors on the open market.

The initial charge is based on an hourly rate but is typically £1,500 to £3,000 in total, Towry said. Once the model portfolio has been chosen, the investor pays an initial charge of 0.75% to 1.5% and then an annual charge of 1.5% to 2.5%.

As with SJP, this includes all platform, advice and fund charges. Towry does not apply an exit penalty for switching to another provider. These charges apply to all clients including those investing in pensions and Isas.

Hargreaves Lansdown offers both DIY and advised services. The DIY service costs 0.45% of the total sum invested as a fee for the investment platform, then you pay for the funds you choose, typically 0.75%, although discounted deals can reduce costs.

You can get advice about a specific issue, such as how to respond to the new pension freedoms. This is typically 1% of the sum you want to be advised about, although it ranges from 0.5% to 2%, depending on the complexity of your needs.

If you then require continuing advice and a regular review, you pay 0.5% a year. The platform charge will be on top on this — so another 0.45% — and then there is the cost of the underlying investments, typically 0.75%. Added together, it means you could end up paying 1.7% a year.

Like many wealth management companies, including SJP, charges can drop if you have a lot of money invested with them. For example, Hargreaves Lansdown charges you less if you have more than £250,000 with them.

Hargreaves Lansdown says about three-quarters of its clients want one-off advice about what to do with their money and then opt for a DIY service — so paying 0.75% for the fund and then 0.45% for the platform: 1.2% a year.

Chase de Vere also offers its clients access to all funds on the open market. It charges up to 3% initially and an ongoing annual advice charge of 1%. The fund and platform charges are on top of that.

As with the other large advisers, the fund charges are negotiated with the manager but are usually about 0.6%, Chase de Vere said. With a platform charge of 0.25%, the total annual cost (after the initial charge) is about 1.85%.

As with Hargreaves Lansdown, you can choose not to receive continuing advice every year, so cutting your annual bill to 0.85%.

How do SJP’s funds perform?

Online tools such as morningstar.co.uk or trustnet.com illustrate the performance of a fund after the fund manager’s charges. SJP says it is impossible to compare the performance of its funds with others on these websites on a like-for-like basis because the returns on SJP funds are calculated after all charges, including the adviser and platform fees.

SJP said: “The client doesn’t care about comparison with other funds typically, as long as the portfolio is delivering against their individual and specific needs, such as: ‘I want a return or yield of 5% a year, and if the portfolio is producing that return, net of all fees, I’m happy.’ ”