Many private bankers will tell you that clients are not price sensitive if you deliver the right service. Yet according to the latest Wealt...

Many private bankers will tell you that clients are not price sensitive if you deliver the right service. Yet according to the latest WealthBriefing Poll, 75 per cent believe that fees are important, with 23 per cent stating that they have to discount to win client business.

At ComPeer, we are seeing increased interest from firms wanting to understand how their tariff stacks up against the competition, and looking for assistance in developing their pricing strategies. This all suggests that fees are an increasingly important factor in wealth management.

The way that wealth management services are priced has changed significantly over recent years resulting in pricing structures that are often complex and confusing for the client. How have these anomalies arisen, and what are the current pressures on fees and charges?

In the UK, the private client traditionally paid for financial services with commission, be that through a stockbroker, investment manager or an IFA.

In the stockbroking sector, post Big Bang, competition started to reduce commission levels and, with the rise of the Internet dawned the low cost brokers.

Gaining exposure to stock markets on an execution only basis, and particularly with retail access to ETFs, CFDs and financial spreads, has never been cheaper.

Stockbrokers and private client investment managers sought to move clients to discretionary services charged on a fee, or combined fee and commission basis.

The argument for fees was that it aligned firm and client’s interests, being based on the performance of the portfolio and reducing any temptation to increase revenue through portfolio churning.

The total cost to the client of a directly invested portfolio has however remained broadly flat over the last ten years at an industry average of just under 1 per cent for an average portfolio size of just under £300,000.

The introduction of open architecture and multi-manager propositions are undoubtedly more expensive for the client. Multi-manager offerings of the wealth management divisions of the UK banks are priced between 1.75 per cent and 2 per cent, justifying higher fees by inclusion of asset allocation overlay and best of breed managers.

Clients of many wealth managers offering a multi-asset class and open architecture proposition could similarly be paying in excess of 2 per cent once all underlying fees and charges are included.

The other main distribution channel for private client investors in the UK has been the IFA. Whilst still commission based, until the last five years, clients would typically be paying 5 per cent up front commission and 1.5 per cent annual management fee.

The internet has again played its part in driving down commissions and the majority of funds can now be accessed with no, or minimal, up front commission through a fund supermarket. The top end of the industry, in part pushed by regulation and in part by a desire to get their own act in order, is belatedly joining the stockbrokers’ move to a more fee based approach.

So, we are seeing convergence towards a fee-based approach but with total expense ratios ranging from 1 per cent to over 2 per cent. And often combined with a lack of transparency in total fee levels and what services they cover.

It is perhaps not entirely rational that a more bespoke private client portfolio, perhaps including a SIPP or other tax wrapper, should cost less than a standard fund based product.

There are those within the industry who will argue that a 2 per cent total expense ratio is not sustainable compared to the risk free rate of return and that fees will need to converge nearer the lower end of the current range or be more clearly linked to wider wealth planning advice. An increasingly sophisticated client is clearly shopping around and looking for an explanation.

The regulation around IFAs and the need to offer fee options, fact sheets and market comparators has not, to date, impacted too much on private client wealth managers with their focus on investment management. However, it is likely that greater transparency will be required by the regulator if the industry does not move that way first.

The challenge in development of a new pricing strategy is not just in transparency but in being clear what you are charging for; financial advice, investment management or administration. It may require some brave decisions.

The financial services sector has not, to date, succeeded in persuading people that they should pay for financial advice. The industry’s plethora of professional qualifications, a perceived history of mis-selling and the general lack of trust of financial institutions means that generically advice is not valued sufficiently to justify a fee.

Anecdotally, we hear of IFAs who have introduced a retainer fee as they migrate to a new business model, fully expecting to lose some clients. Client losses have always been less than expected, reflecting the fact that on an individual relationship basis, clients did value the advice sufficiently to pay a fee.

It is perhaps a risky strategy for larger wealth managers and maybe a real test of the strength of the relationship, but the higher end IFAs, re-branded as wealth managers or financial planners, are beginning to succeed in introducing fees for financial advice.

For most wealth managers, fees continue to be based on the management of assets, often with advice and structuring thrown in for free. Investment fees need to be justified by investment performance. If a 2 per cent total cost is not sustainable in a lower return environment, then firms must embrace lower cost ways of achieving market exposure or charge separately for advice and structuring.

In summary, it may be true to say that existing clients are not overly price sensitive if they recognise the value of the service they are receiving. But we are in a situation where the target pool of potential clients do not inherently value financial advice, nor necessarily trust the mainstream providers.

Clients will demand greater transparency and competition for new business can only continue to force fees down. In developing a pricing strategy, firms must focus on where they add value and then charging accordingly.