Transparency must be implemented but it is not a panacea for excessive fees, senior executives told delegates at the latest Breakfast Briefing event in London.

Over-priced, opaque wealth managers "will be toast”, as a new generation of online entrants using simple, low fee structures and cutting-edge technology step up to grab market share from disenchanted customers, according to a panel of industry experts.

At WealthBriefing’s 19^th Breakfast Briefing in London - entitled Transparency and Pricing in Financial Services - a panel of five industry experts drew an audience of nearly 70 senior delegates from the wealth management industry. The event, in association with Logica and Advent Software, was held at the City-based offices of law firm Pinsent Mason last week.

Opinion was broad and sparked heated debate, but panelists agreed on one thing: unless the industry provides more transparency and strips out excessive fees, new entrants will lure customers away.

A new generation

David Norman, (known as Dan), chief executive officer of Sevenoaks-based independent asset manager TCF Investment, warned that nimble online players will take market share from archaic wealth managers with obscure fee structures.

“Investment is hideously complex. Transparency in the form of a 450-page document explaining fee structure will not help. But technology can assist a new generation of agents. Imagine a Google ISA App, or an Apple iPot – a virtual pot where you can collect all your pensions and products,” he said at the briefing.

Painting a bleak picture for the industry, he added: “Prices (for wealth management) are not low and they are not going down despite assets rising. New entrants have a compelling incentive to use technology to simplify the process, bring down fees and win customers with trust. Many existing players are toast. The industry thrives on complexity to allow it to charge a premium without the end customer being able to ask too many questions.”

He explained the level of costs in the industry is “ridiculous” and clients are suffering from “complete lack of trust.”

Jerry Norton, a senior executive at UK-based management consultant Logica, agreed that online players will increasingly pose a threat to traditional mutual fund managers with multi-layered fees. “The FSA is not a threat to the industry. Ultimately it is a Google that the industry should be worried about. The outsiders will make the difference,” he warned.

He added that industry obfuscation is partly deliberate and invented to cover layers of fees, but that technology will ultimately help to slash some of the costs.

“Technology can help us. Fees are due to inefficiency and the so-called friction or administration cost. TPAs, brokers, custodians, all take a slice of the profit.  The process is currently inefficient,” said Norton.

He pointed out that at the moment, there is no incentive for firms to eliminate friction costs. “If we forced some of those costs to be disclosed not as a percentage but as a breakdown of how much profit each party is making, it would be much clearer to the end client," he suggested.

The industry is not always at fault 

Norton countered that fund managers are not entirely culpable. “In defence of the industry, it will always be a difficult balancing act. Investors are greedy and always searching for the 'golden nugget'…so there will always be an appetite for complex investment products and things wrapped around those products which attract high fees in exchange for high returns.”

David Scott, chief executive of wealth management boutique Vestra Wealth, agreed some firms charge more than others, but asserted that clients are happy to pay higher fees as long as they know what they are paying for. He cited the example of economy, business and first class flights. “Some people are happy to pay an extra £4,000 to sit in first class in return for a bit of leg room and their lunch served on bone china. There is a market for higher fees, but the customer must be able to decide. Transparency is the key thing for a client to consider when selecting a manager.”

He continued: “The advisor must spell out clearly what they are charging and retrocessions they receive. It is then up to the client to decide whether the price that is being quoted matches the service they want. Furthermore, there has to be transparency on what the underlying investment is. Unfortunately, there appears to be a trend by many banks to be re-introducing more and more complex swap-based products, where the client is actually invested in an asset completely different to what they thought they were investing in. These instruments may be a good way of delivering the desired outcome, but it is crucial that the client knows what is behind the instrument. ''

Regulation is key

Ed Moisson, head of UK and cross-border research at data provider Lipper, said that transparency is largely irrelevant when fee levels are unregulated in the UK. Even if managers provide greater transparency, fees will not necessarily decrease. “Retail investors are paying more, even as information on funds improves,” he said.

Moisson said that the problem ultimately lies with the lack of impartiality regarding fiduciary responsibility. He pointed to the US, where funds are obliged to have a majority of independent directors on their boards who decide prices and are specifically tasked with reviewing fee levels.

“The reverse is true in the UK, where trustees oversee fiduciary responsibility, which has not been extended to the oversight of fees. In the UK, the total expense ratio is higher than in the US and almost every other European market. I don’t think the two factors are unrelated,” he said.

Moisson suggested: “Perhaps someone else should be overseeing fee levels, someone else to haggle over prices, rather than the retail investor, and establish what costs are really involved and whether these are appropriate. “

The UK’s Financial Services Authority has said that it does not act as a price regulator but it recently published a discussion paper indicating that this might change.

“Intervening on prices would be a remarkable change of tack for the FSA.  What would be even more remarkable is whether retail investors will prove able to drive down costs,” Moisson said.

Education is critical

David Bower, managing director of iShares, responsible for marketing in Europe, Middle East and Africa, took a different tack.

He argued that across many financial products,for example cash deposits, the majority of investors do not want or benefit from transparency. “Transparency does not reduce complexity – it exposes it. These are inherently complex products and many end investors cannot be empowered by transparency.” Bower argued until the majority of investors can be engaged enough to comprehend a standard prospectus, it is up to their agent to ensure they receive fair prices. “And that is why clients need total trust in their adviser that there are no conflicts of interest, which will in part be achieved through transparency provided to their advisors by product manufacturers," concluded Bower.

The key take-away message from the Breakfast Briefing was that although transparency must be implemented, it is not a panacea for the excessive fees inherent in the industry. However, until investors are educated to the point where they can understand simple percentages and figures, greater transparency is irrelevant. Ultimately the winners will be those who make themselves not only more transparent but reduce friction costs.

To find out about future Breakfast Briefings, please contact Richard Morris at Richard.Morris@clearviewpublishing.com