Today’s wealth management industry is as deceitful as the tobacco companies of the past

Hannah Goldsmith
Ban Introduced On Smoking Marijuana In Public Areas
Hidden fees structures are a form of negligence which is similar to the tobacco industry (Source: Getty)

When medical suspicions of health impacts of cigarettes were first raised, the tobacco industry obfuscated and suppressed their own knowledge of smoking risks.

In many ways, this mirrors what is happening in the wealth management industry today, as many companies suppress information about their fee structures, and often fail to warn consumers of the long-term damage these hidden fees do to their pension and investment portfolios.

Personally, I see this as negligence which is similar to the tobacco industry arguing that smokers assumed the risks when they decided to smoke, or that their cancer might be related to other causes.

To date, the wealth management industry's size and marketing power has allowed many businesses to maintain this status quo, refusing to accept any responsibility. But that could soon change.

When the Financial Conduct Authority (FCA) conducted a review of 722 funds from 15 asset managers (representing £563bn of retail assets,) it concluded that: "Actively managed funds do not outperform their benchmark after charges and both fund investment objectives and fee breakdowns are unclear to investors."

It went on to say that additional ongoing charges can add significant amounts to the cost of a fund, with some small funds charging of up to 0.9 per cent in addition to the annual management charge (AMC).

"Using the AMC could therefore result in retail investors finding it difficult to accurately compare charges and potentially underestimating the cost of some funds."

This is a clear statement of intent to change how these wealth management companies run their future business objectives.

However, the FCA's statement makes it clear that these companies have been relying on generating fees and having no regard to their client’s financial outcomes.

In other words, behaving in a very similar way to those early tobacco companies.

If investors begin to realise how much of their money they give away. and the negative effect this has on their lives (like the smokers of the past), would they start to question what they have been sold?

Let us look at an example of two investors with a fund value of £150,000.

Colin invests with company A, which is charging the industry average of 2.3 per cent. Paula invests in company B, which is charging 1.1 per cent. Both companies average five per cent growth per year over 25 years and offer the same consumer protection.

After 25 years, Colin's £150,000 portfolio would be worth £287,385, giving him a profit of £137,385. What company A did not tell Colin is that the fees of 2.3 per cent represent a total cost over the 25 years of £120,595. So, it has cost Colin £120,595 to make £137,385.

By comparison, Paula's £150,000 portfolio would be worth £385,355, meaning she has made a profit of £235,355.

Company B explained to Paula that the fees on her investment funds will affect the value of her long-term wealth. Paula is comfortable paying 1.1 per cent in fees, which represents a total cost over the 25 years of £69,042. So, it has cost Paula £69,042 to make a profit of £235,355.

In Paula's case, the wealth manager did the right thing by explaining the impact that fees could have on her long-term portfolio value.

One day, I believe that the wealth management industry will carry risk warnings on every new contract: “High fees can damage your wealth.”

Make sure your investments are in the best of health – check the fees you are paying and, if necessary, look for a better deal.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.