Competitor Analysis. Conducted on behalf of Nutmeg. February ComPeer Limited 8 Laurence Pountney Hill London EC4R 0BE

Transcription

1 Competitor Analysis Conducted on behalf of Nutmeg February 2014 ComPeer Limited 8 Laurence Pountney Hill London EC4R 0BE T: +44 (0) F: +44 (0) E: info@compeer.co.uk

2 Contents Introduction 2 Charging structures 3 Minimum investments 5 Time to sign up 6 Disclosing performance 7 Independent reviews 7 ISAs 8 Customer support 9 Investment bias 10 Regulatory processes 11 1 P a g e

3 Introduction The following findings were sourced by ComPeer in order to analyse key differentiators between services provided by a group of wealth managers and execution only stockbrokers. The research focussed on a sub group of firms, analysing the charges, support services, time to open an account, ISA offering, compliance processes, investment propositions, minimum investment criteria, distribution channels and the use of independent customer reviews. The firms included within the research were: Execution Only Stockbrokers Charles Stanley Direct Fidelity Hargreaves Lansdown TD Direct Investing Wealth Managers Charles Stanley Coutts Nutmeg Rathbones St James s Place Wealth Management The research was largely based on information available in the public domain (i.e. as outlined on firm websites or recent articles in the mainstream press). Where this was not available, the information was sourced from phone calls to customer support services. For wealth managers the service reviewed was discretionary investment management, which is offered by all chosen wealth managers and is largely viewed as the premium service offered in the industry. Firms such as Charles Stanley, Coutts and Rathbones also provide a range of advisory and / or private banking services. In the case of execution only stockbrokers, the implementation of the Retail Distribution Review (RDR) has resulted in many of them adjusting their charges related to fund dealing to compensate for the removal of trail commission. This is therefore an area where many firms are now advertising their new look services and so the research predominantly focussed on a fund investor experience. 2 P a g e

4 Charging structures With the removal of trail commission, execution only stockbrokers have lost a sizeable source of revenue related to fund dealing. To compensate, many have either introduced a platform fee, which typically relates to a percentage of fund holdings, or alternatively have started to charge dealing commissions for funds. In the case of the four execution only stockbrokers reviewed in this research, all of them now charge some form of platform fee. In order to invest in a tax efficient manner, many investors will use stocks and shares ISAs. In some cases there are additional administration fees related to these accounts. Among wealth managers, the most common charging structure for discretionary investment management is an annual management fee, which in many cases is tiered dependent on the portfolio value. Often any ISA administration costs are included within the annual management fee and in some cases dealing commissions and / or transaction costs will apply. As a further cost to the client, underlying fund charges exist. However, firms rarely disclose these in their fee tariffs in fact Nutmeg are the only one in the selected group to outline their existence and average cost, proving its charging structure to be more transparent than most. Below we show a table of comparative charges in the first year of investment for given portfolio sizes. Where an initial fee is charged, this is included in addition to 1 year s worth of annual management fees. It is assumed that all investments are in clean funds (i.e. not paying trail commission) within a stocks and shares ISA and 10 transactions (online for execution only stockbrokers) take place during the year, with the value of each transaction 1/10 of the overall portfolio value. As underlying fund charges are not disclosed by all they have been excluded from these calculations. When a firm provides an option of charges (i.e. fee only or fees + commissions), the charge of the cheapest option is shown. Charges are inclusive of VAT. Year 1 Charge Service Offered Portfolio of 10,000 Portfolio of 50,000 Portfolio of 250,000 Portfolio of 1,000,000 Portfolio of 10,000,000 Charles Stanley Direct Execution Only ,000 15,500 Fidelity Execution Only ,000 2,000 Hargreaves Lansdown Execution Only ,125 3,000 4,000 TD Direct Investing Execution Only ,500 35,000 Charles Stanley Discretionary ,150 12,150 42,150 Coutts Discretionary N/A N/A N/A 12, ,000 Nutmeg Discretionary ,250 3,000 30,000 Rathbones Discretionary N/A N/A 3,320 8,530 46,780 St James s Place Discretionary 650 3,250 16,250 65, ,000 From the table of charges, St James s Place is significantly more expensive than the other firms as a result of the 5% initial charge for investing in its funds. As an initial charge, it 3 P a g e

5 would not be additionally charged in future years, making the firm s charges more competitive over the long term. However, with an annual management fee of 1.5% on average, it will remain at the top end of charges tables. Unsurprisingly, execution only services are the cheaper options for most portfolios, although Nutmeg s charges make it very competitive with these despite offering a more advanced discretionary service. In fact, as TD Direct Investing does not have a cap on its platform fee, Nutmeg is cheaper for a 10,000,000 investor. Even more encouragingly for wealthy investors seeking a discretionary service, at the 1,000,000 mark, with Nutmeg s 0.3% charge (including VAT), it employs the same charge (or cheaper) than Hargreaves Lansdown and TD Direct Investing. Hargreaves Lansdown and Fidelity are by far the cheapest for a high net worth investor, with no platform fee charged for balances in excess of 2,000,000 and 1,000,000 respectively. Higher charges will directly impact net performance, and so to provide value for money discretionary services need to be more advanced than execution only. Outlined below are some of the common key differences between an execution only and discretionary service, further emphasising the competitive pricing structures of Nutmeg, given it offers a discretionary service at a price only marginally higher than an execution only stockbroker: Execution Only - Investors responsible for all investment decisions - Investors required to make all adjustments and monitor their own investments - Limited free research provided on websites for the investor to use - Although there is no limit to the number of holdings in a portfolio, diversification likely to be restricted due to limited market knowledge - Investor may select top performing investments (i.e. funds) without understanding associated risk - Online portfolio valuation and trading facilities. Trades can also be placed by phone - Telephone customer support team to answer general account / trading queries Discretionary - Wealth manager responsible for all investment decisions on behalf of the investor. Qualified and often experienced investment managers will manage the portfolios - All investments monitored daily by an investment manager, allowing fast response to market adjustments, making appropriate changes to asset allocation and rebalancing portfolios - In-house teams provide all investment research, covering the global markets in some cases - With teams able to monitor a wider range of markets, greater diversification can be achieved, mitigating some investment risk - Design a portfolio to maximise return against risk, having profiled an individual investor s attitude to risk and financial circumstances - Online portfolio valuations with regular professionally designed performance reports sent and presented in one to one meetings with the portfolio manager - Direct contact with a portfolio or relationship manager specifically responsible for an investor s portfolio. In some firms there is a limit to the number of portfolios a portfolio manager can take responsibility for to ensure client service levels 4 P a g e

6 Minimum investments From the table in the charges section, N/A implies that this service is not available due to the portfolio no meeting the minimum investment criteria. Minimum investment thresholds are almost non-existent in the execution only sector, with the exception of some firms requiring a minimum 1,000 lump sum investment in funds. They are far more common when selecting a discretionary service with a wealth manager, with some firms believing a minimum investment is required to operate in a profitable manner with this level of service. However, they can vary significantly from firm to firm. Below are the minimum investment criteria for bespoke discretionary services: Coutts - 1,000,000 Rathbones - 100,000 Nutmeg - 1,000 St James s Place No minimum Charles Stanley No minimum In the case of St James s Place, although there is no set minimum investment, when you speak to one of the Partners they recommend that you invest a minimum of 5,000 in an individual fund. For Charles Stanley, again there is no minimum investment threshold for bespoke discretionary investment management. However, with the minimum annual fee of VAT, it would prove to not be cost effective to invest small amounts with the firm. 5 P a g e

7 Time to sign up When targeting high net worth investors, many will be leading busy lifestyles and so expect efficiency when opening an account. Execution only stockbrokers have traditionally been the leaders in this area, in most cases providing the functionality to open an account and start investing within 10 minutes or in some cases (Hargreaves Lansdown) advertising it can be done in less than 5 minutes. Clients are required to complete a series of online forms, traditionally providing personal and banking details, selecting the type of account they wish to open, setting preferences and then agreeing to terms and conditions. From the findings of the research, Fidelity was the only execution only stockbroker to have some complications and time delays when opening an account. Opening a fund account was no hassle and matched the less than 10 minutes set by its competitors. However, opening a share dealing account was more complicated and time consuming. One reason behind this could be that Fidelity outsources its share dealing services (to Charles Stanley) and so more forms may be required to be completed. In this case once a client has completed the online application, they are sent a paper version, which they need to sign and return before the application is approved and therefore the account is opened. With the reliance on postal services this provides a natural delay and so it could be days or weeks before an account is opened. Of the five wealth managers, Nutmeg sets the precedence for efficiency in opening an account, taking only 10 minutes to set up a discretionary account, which has been chosen based on investment criteria and savings intentions set by the client and can easily be adjusted. Rathbones and Coutts require new clients to complete online questionnaires as part of the sign up process. However, rather than the result of these questionnaires being an instantly set up portfolio, the results are sent to an investment manager who will then call back to set up an initial meeting to discuss the intentions of the client and possible portfolio arrangements. Often, two or more meetings will be required before a portfolio is opened, taking the timeframe to sign up beyond the two weeks mark. However, this methodology is often advertised as the best method to fully understand the needs of the client and to prove the one to one service a client can expect if they were to use that firm. Charles Stanley and St James s Place skip the stage of completing online forms, and instruct new clients to call their local adviser or Partner to set up the initial meeting. All four of these wealth managers have wide branch networks and so it is likely there will be a local office to conduct the initial meeting. 6 P a g e

8 Disclosing performance In a survey of 1,000 investors, conducted by ComPeer in October 2013, it showed that investors most commonly vote for investment performance as the main reason for selecting a wealth manager. Additionally it tops the rankings for the main reason for staying with a wealth manager. Therefore one may expect wealth managers to openly disclose their performance statistics as a marketing ploy, provided it was good enough to add sufficient value to a potential client. However, this is rarely the case. Investment performance is not applicable to the execution only stockbrokers, although the surveyed firms all provided the performance statistics of any funds that can be purchased through them. Of the five wealth managers, Nutmeg was the only one to openly disclose the performance of all of its discretionary portfolios, providing historical performance charts across its range. As St James s Place s service is a third party manager selection process rather than an inhouse run discretionary portfolio, it does not have a discretionary portfolio as such. Therefore it outlining the performance, via factsheets, of the funds included within its range is the maximum it can provide performance-wise. Rathbones describes all of its portfolios as bespoke and therefore it does not have a model portfolio to provide performance statistics for. However, there is the possibility to disclose performance measures for an example portfolio, to provide potential new clients with some ideas as to what they can expect. With this not available on the website, it can be assumed that some performance charts are provided during the initial consultation meetings. Coutts and Charles Stanley each have standardised model portfolios, but in both cases no performance charts for these portfolios are available to view on the website. However, Charles Stanley has an in-house fund management division, Matterley, for which it discloses the performance of its 5 funds via factsheets. Independent reviews Word of mouth can be a key method of winning new clients. In many industries customer feedback can therefore be used as advertising throughout firm websites to initiate the word of mouth procedure. Based on the research findings, this is not a common feature among the wealth management industry. Nutmeg was again the only one of the subgroup of firms to provide any customer quotes within its website. Encouragingly, it also openly provided results from ongoing independently-run (Reevoo has been commissioned to conduct the survey) customer surveys, with 368 reviews available to read online. Charles Stanley in some way misleads clients into thinking they could be about to read reviews of the firm, when guided to a section described as Accolades what others say about us. In reality they are being taken to a page of recent award wins, with no independent reviews. With all other surveyed firms, there were no obvious links to any independent reviews. 7 P a g e

9 ISAs With the ISA season quickly approaching, it is at this time of year when wealth managers and execution only stockbrokers make a push for additional investments by alerting clients to make sure they have used their full ISA allowance, and advertising each of the different ISA accounts on offer. Below are the different available ISA accounts as advertised on the firm websites: Stock & Shares / Investment ISA Junior ISA Cash ISA Tracker ISA Charles Stanley Direct Fidelity Hargreaves Lansdown TD Direct Investing Charles Stanley Coutts Nutmeg Rathbones St James s Place All firms offer some form of stock and shares or investment ISAs, which are a must have in wealth management given the tax savings they provide. With many firms encouraging clients to think of future generations, Junior ISAs are becoming increasingly popular and commonly provided in the industry, with two thirds of the surveyed firms offering them. Outside of the private banks, cash ISAs are rarer, with Hargreaves Lansdown the only firm other than Coutts to provide them as part of the Vantage service. As a unique offering, Coutts also provides Tracker ISAs which are designed to track within 1% of the returns of the FTSE All Share Index. 8 P a g e

10 Customer support Wealth management is a luxury service and given the size of investments should be delivering high levels of customer support to provide value for money. In recent years, execution only stockbrokers have invested heavily in customer support features, significantly widening the volume and quality of research available for free on their websites. Fund research often includes lists of the most popular or best performing funds in relevant sectors. Investment guides are regularly available to download, with FAQs designed to answer account or investment related queries. Meanwhile, customer services teams are on hand if investors wish to pick up the phone and have their queries answered. Online portfolios and valuations are now a given among execution only stockbrokers and wealth managers, with Fidelity, Hargreaves Lansdown, TD Direct Investing and Coutts also offering mobile services (such as apps) to conduct investment decisions on the move. For wealth managers, with the exception of Nutmeg, the customer support is focussed around the one to one and direct relationship a client will have with an investment manager, relationship manager, private banker or partner. Client reports are regularly sent out (quarterly or six monthly), with face to face meetings designed to outline the performance of the portfolio and discuss any future changes. In the case of Nutmeg, a client is not assigned a portfolio manager. Instead, there is a support team provided to cover the questions of all of the clients, with various ways of liaising with this team (online live chat, secure messaging, by phone). Social media is also an increasingly used portal for contacting a group of existing and potential new clients with the latest firm or investment news. Below are some of the more unique customer support services provided by some of the selected firms: Charles Stanley Direct foundation portfolios that recommend fund breakdowns given the profile of an investor. Fidelity a people like me service examines the investment decisions made by clients of a similar age and portfolio value. Hargreaves Lansdown guidance to fund investments with ready-made investment portfolios dependent on a client s attitude to risk and size of investment. It also has multiple contact support numbers based on products to ensure clients instantly talk to the right person regarding their queries. TD Direct Investing hosts seminars and webinars on a variety of investment topics. Nutmeg live chat feature provides an instant messaging service between a client and a member of the support team. 9 P a g e

11 Investment bias One of the key objectives of RDR was to prevent the mis-selling of products, with one action being the banning of trail commission that incentivised some stockbrokers to advertise certain funds which paid a proportion of the management fee to the firm. With the formation of clean funds, this should no longer be the case in the industry. However, as part of the research each firm was investigated to gauge if there were, at any point, any suggested bias in their product offering. The first to provide a slight indication of bias was Fidelity, where through one portal to opening a fund investment account, you are given a selection of fund portfolio options. However, all of the options were Fidelity funds. Hargreaves Lansdown and Charles Stanley Direct are pushing the boundaries as to what constitutes advice through their suggested portfolio lists. However, this is not to say they are bias, as in both cases the portfolios consist of third party investments and are all clean investments and so provide no incentive for the firms to push them. Charles Stanley s discretionary service appears to be going out of its way more than others to prevent bias. Not only does it take a whole market approach to investments, but if at any point it includes Matterley funds (its in-house investment division) in the portfolio it does not count the value of these funds when calculating the value of portfolio to charge its annual management fee percentage against. St James s Place has the most restricted investment range through its pre-defined list of third party fund managers. However, with it not having any in-house investment managers or in-house funds and not receiving any commission from its fund selections, this does not constitute bias. Rathbones, Coutts and Nutmeg also all showed no signs of bias though their investment choices. 10 P a g e

12 Regulatory processes The FCA has made it clear that it is coming down harder on those firms not sufficiently complying with Know Your Client (KYC), Anti Money Laundering (AML) and Suitability measures. Fines have been issued to firms unable to demonstrate these measures, with Coutts one of the firms at the wrong end of sizeable fines for its lack of Suitability and AML processes. For each of the execution only stockbrokers, before opening an account one must agree to have read certain documents (i.e. Key Features or Terms of Service) that outline the processes in place. In the case of Charles Stanley Direct, it also requires clients to provide either a driving license number or passport details to specifically prevent AML. With wealth managers taking the investment responsibility off the hands of the investor, they are required to provide stricter risk profiling measures. For example, Charles Stanley uses tools provided by Distribution Technology, Rathbones advertises its internal risk controls and performance measures (outlined in greater detail during the meetings), and Nutmeg use an introduce yourself feature to ensure investments are appropriate and affordable given the income and debts of each individual client. Terms of Conditions documents are also provided by most to outline other AML and KYC processes, with Nutmeg additionally requiring verification before any investments can be made. Over the last couple of years these processes have become far more transparent for the investor and are now a must to be explained before a client invests with either a wealth manager or execution only stockbroker. 11 P a g e