Rip-off fees are over as wealth managers face the music
City clampdown on charges and slapdash practices has created casualties in the £620bn industry, writes
During the good times, being a wealth manager felt like a bet you couldn’t lose. Assets under management – the key barometer of any manager’s health – kept rising and rising across the industry, and so too did the fees and profits. Not anymore.
Gloom has descended over the £620bn industry after the City watchdog cracked down on its rip-off fees and slapdash practices.
St James’s Place, the UK largest wealth manager with £180bn of assets under management, became the most significant casualty last month after taking a £426m provision to cover thousands of compensation claims.
Quilter, another major wealth adviser, then spooked the market by confirming it may also be forced to set aside money for potentially similar claims. The Financial Conduct Authority (FCA) has written to more than 20 of the largest wealth managers who offer advisory services demanding to know how many customers may be affected. The number will probably run into the tens of thousands.
Concerns stem from the way fees have long been charged in the industry. Customers typically pay an annual fee that entitles them to a chat with their financial adviser to discuss their investments, known as ongoing service. But in many instances, these reviews never took place, or at least were never logged, meaning wealth managers can’t prove a meeting happened or measure the outcome.
“Lots of advice businesses used to roll up the fee they charged customers into one fee. Part of that was meant to be an ongoing advice fee but the reality is there’s no evidence that this ongoing advice was provided,” says Peel Hunt financial analyst Stuart Duncan.
The jury is still out on how deep the issue goes, but anxiety and uncertainty over possible compensation costs are stalking the City.
Duncan says: “You’ve got to think there will be others where that’s the situation as well. There’s an argument that it will prove to be systemic and that there will be lots of customers found to not have had the advice they’ve been paying for.”
If poor practice does prove to be widespread, it will represent a remarkable fall from grace for the sector. Wealth managers have been remarkably successful in recent years. Assets under management have ballooned from £465bn in 2018 to £622bn in 2022.
The surge came as furlough payments, lockdowns and low interest rates for much of the period left many older, richer Britons with money to spare and looking for advice on what to do with it. Although not all wealth managers offer advice, the asset figures provide a good barometer for the success of those that do.
This strong performance did not go unnoticed: nearly all of Britain’s biggest banks have in recent years announced plans to expand their wealth management offerings in an effort to boost growth.
However, the wind has changed direction in the sector as a result of a tough new rule, known as the Consumer Duty, that was introduced by the FCA last summer.
The reforms meant financial companies had a legal duty to ensure their customers were getting the best possible outcomes. The regulator had previously warned that the new rules could be a catalyst for a wide-ranging review into how wealth management advisers treated customers.
In December the FCA went public with its concerns, raising the alarm over examples of poor practice where customers were paying for a service they didn’t need or in some cases didn’t get.
“We’re seeing too many firms providing a service which the client doesn’t actually need,” Kate Tuckley, the FCA’S head of consumer investments, said at the time. “And the worst example of that is where a customer is paying for a service, for example, an annual review, which it doesn’t actually get at all.”
The FCA escalated the issue, by sending questionnaires to around 20 wealth advice firms asking two simple questions: had they reviewed what ongoing advice customers were getting and were any changes made?
They also requested seven years worth of data stretching back to 2017 asking how many customers were entitled to, paid for, and received annual reviews.
Although the data request was not made under its formal enforcement powers, it provoked disquiet in the City. Quilter, which manages £107bn of client money, last week confirmed it
‘That was meant to be an ongoing advice fee but there’s no evidence ongoing advice was provided’
‘We just want to make sure that we can show that we’ve done everything in the right way’
was a recipient of the FCA letter and admitted it could face “remedial costs”. However, the company said it was too early to tell how bad it would get.
Chief executive Steven Levin said Quilter is still at the early stages of establishing the facts, but has promised to “put right” anything found to have gone awry.
“It’s an area where we just want to make sure that we can demonstrate that we’ve done everything in the right way,” he says. “If there are any things that are wrong, we’ll put them right.”
Analysts at Citi have speculated that the crisis could cost Quilter the equivalent of 4pc of its market cap, equivalent to around £56m. Shares have fallen more than 5pc over the last month. Levin stresses his company is “at the start of the journey” when it comes to estimating provisions.
“SJP clearly have been in much deeper dialogue on this for a longer period of time but the FCA has written to the industry,” he says. “It will probably become an ongoing dialogue over time.”
Many wealth managers are no longer listed on the UK stock market after a string of them were snapped up and the FCA has not revealed which firms it has written to, meaning finding out how far the problems spread is difficult.
Rathbones, which manages £61bn, says it is not facing any of the remediation issues. However, Paul Stockton, the company’s chief executive, says the wealth management sector is under renewed scrutiny more broadly. The FCA is “going to be looking for consumer harm and act on it, so I don’t think that’s going away soon,” he says.