Many of you will have seen the article in the Money section of the Sunday Times at the weekend, celebrating a victory for the newspaper in their campaign against high charges levelled by St. James’ Place (SJP), one of the largest financial advisers in the UK. SJP are not independent of course but according to the Sunday Times, they currently manage £158 billion on behalf 941,000 customers.
Following a new initiative by the Financial Conduct Authority (FCA) called Consumer Duty, SJP have finally agreed to remove the 6% charge they levy on early withdrawals of pension investments. Independent Financial Advisers (IFA) like me, have been frustrated by how they have been able to get away with this for so long. Since 2017 pension exit charges have been capped at 1% by law (Clearwater charges 0%), but SJP had managed to justify its 6% charge by saying it is not an exit penalty but an “early withdrawal charge”. Talk about semantics.
Good news then for SJP customers! Not so fast! SJP will not introduce these changes until the second half of 2025 (why wait?), and the exit charge will be replaced with an initial advice charge of 4.5% (Clearwater charges a maximum of 1%).
It’s not all about cost of course, there is the question of value; as my late father said on this subject, “You wouldn’t buy a cheap parachute, would you?” If additional costs lead to superior performance, what’s the problem? BUT according to BestInvest in August 2023, SJP was rated the worst performing fund manager overall, managing six of the ten worst ‘dog funds’ with £29.3bn among them, and topping the 'Great Dane' list of the largest laggards. SJP ran more than 63% of the underperforming assets in the whole sample, far more than second-placed Artemis with 5.8%.
Despite appearances, the purpose of this missive is not simply to have a go at SJP, but reading the Sunday Times article got me thinking about how difficult it is for consumers to understand the costs of financial advice and for them to know how competitive (or otherwise) their financial adviser really is! Understandably, fees and value always come under the spotlight when investments are performing poorly, even though most clients understand that Financial Advisers and fund managers cannot influence markets, whether they are rising, falling, or moving sideways.
I will now try and illustrate where Clearwater fit into the cost/value picture. The following is taken from some research by Numis, a market analyst, that was published in the Financial Times recently. Adam has added Clearwater to the table for comparison purposes.
The above figures include, advice costs, platform costs, investment management costs and an allowance for trading costs i.e., the total cost of running a portfolio using a Financial Adviser. Even direct offerings can be more expensive than some Financial Advisers, Numis said that DIY platform Hargreaves Lansdown customers paid about 2.28% a year on average over a ten-year period.
Let’s come back to the question of value. Just where do Financial Advisers like Clearwater add value, particularly when one’s investments are going down and your adviser, on the face of it, appears to be doing very little?
Source: Brad Jung Russell Investments
The interesting thing about the above graphic is that it is blocking clients’ bad behaviour that adds most value i.e., advising clients not to sell after a market fall or not to look for short-term gains when markets have hit a new peak.
There is a way of measuring this effect: see graphic below of the 30-year Dalbar study in the US.
Source: Dalbar
The conclusion drawn from the above is that without an adviser to hold their hand, the average investor will underperform the market in which he/she is investing, and this begs the obvious question, why does this happen?
The answer is neatly conveyed in the following picture:
The answer is clearly behaviour! If we as advisers can prevent our clients falling into the Behaviour Gap, we are truly adding value over the long-term, even though it might not be immediately obvious in the short-term.
The above just looks at the impact of advice on investment returns and I would argue this is just a small part of what we do. Once we have accepted that capitalism works and that over the longer term a highly diversified portfolio will deliver inflation beating returns, we can begin to focus on the really important aspects of Financial Planning that are sometimes a little less tangible. We can help answer profound questions such as, what do I want to do with the rest of my life and how can I achieve that? When can I stop doing the things I hate and start doing the things I really enjoy? Can I afford to help my children and if so, with how much? Can I afford to turn left when I get on the plane, once in a while? When can I achieve peace of mind?
I see the most important part of my role as helping my clients to enjoy their best lives, within the constraints of the resources at their disposal, and the best way to do this is with a long-term focus and not making knee jerk reactions when things seem temporarily off track.
A useful thing to remember when markets are falling is the following:
“All equity market declines are temporary and eventually give way to the resumption of the permanent advance. Permanent loss in a well-diversified portfolio is always a human achievement of which the market itself is incapable” – Nick Murray
Nick Murray is eluding to the fact that losses only become permanent if you sell!
I hope you have found this piece interesting but, if you have any questions about this piece or any other finance related matter, please do not hesitate to get in touch.
Yours sincerely,
Graham Ponting CFP Chartered MCSI
Managing Partner
