Imagine you take your pension and ISAs to a typical wealth manager. Arrive with less than £100,000 and you’ll more than likely be politely ushered into one of their model portfolios, possibly with a degree of apology. If you bring more than this, you could be through to the ‘VIP room’ and given a bespoke portfolio. But the idea that a firm’s ‘model portfolio service’ is somehow the poor relation is as perverse as it is outdated.
Many traditional UK wealth managers’ websites and glossy brochures tell you that you need a bespoke investment portfolio, designed around your individual needs. This will be ‘carefully constructed’ in accordance with your ‘unique objectives’, creating an investment strategy that is ‘individual to you’. Your bespoke portfolio will commonly be constructed and managed by a ‘personal investment manager’, to whom you will have a direct line and who will meet with you regularly.
At first glance, this approach appears to make sense. After all, everyone is unique and has their own specific financial goals and reasons for investing: some investors may seek a comfortable income in retirement, while others may want a financial cushion for their family.
A closer analysis, however, sheds a different light. Each client has unique needs and individual circumstances, and therefore most certainly needs individual – indeed bespoke – financial advice and planning. But does a bespoke investment portfolio make any sense?
Bespoke portfolios: the firm’s best thinking… watered down just for you
Most wealth management firms employ a central team of specialist investment managers with many years’ experience of investing. They spend all their time looking at the macro-economic picture, the financial markets and portfolio construction and risk management. They research, analyse and manage a set of asset allocations for diversified investment portfolios. Each of these ‘model’ portfolios therefore reflects the ‘best thinking’ of these investment professionals for a specific risk-reward profile, objective or set of investment constraints.
The upshot of this is that subsequent changes made by a ‘personal investment manager’ to the model portfolio allocations are, by definition, a move away from the firm’s best thinking. To add insult to injury, these changes will have been made by someone whose role it is to manage client relationships at the same time as portfolios, and who is in a significantly worse position to make such decisions than the specialist investment team – so the question is, who would want that?
Centrally-managed portfolios: the superior option… with a lower price tag
Given the choice of (i) a bespoke portfolio run by your ‘personal investment manager’ and (ii) one of the firm’s model portfolios run by its central investment team, based on the facts, it makes sense to opt for the model portfolio, even if the fee is the same.
Happily, the reality is that, in addition to providing the best investment allocations and portfolio management experience that the firm has to offer, model portfolios should also provide the benefit of substantially lower fees. Because centrally-managed portfolios not only give clients access to the highest expected returns of the firm, but are also significantly more cost effective than running a bespoke portfolio allocation per client.
For example, it is quite common for it to cost between 1.5 to 2% all in to have a £500,000 portfolio managed for you in the UK – “paying 1.5 or 2 per cent to someone who optimises your portfolio” as quoted in this 2022 Financial Times article, while the charge for this popular balanced portfolio – as reported in The Telegraph – comes in at 1.68% a year, with a hefty entry fee of 5%.
The comparable cost of having the same sized portfolio managed centrally by Netwealth would be 0.65% (made up of Netwealth’s fee of 0.35% and underlying fund charges of up to 0.30%). This significant reduction comes from a vastly streamlined operational setup, and doing away with the salary, expenses and office space costs associated with personal investment managers. Of course, not all firms pass on these cost benefits to their clients and, if yours doesn’t, you should look around for one that does.
A 1% or so cost saving may not sound that much, but its effect can be truly eye-watering compounded over many years. Over 10 years, for example, you could be over £17,000 better off for every £100,000 invested if you saved 1% in fees by using a more competitive wealth manager like Netwealth (comparing all-in fees of 1.65% vs 0.65% per annum, assuming an annual gross investment return of 5%).
That’s equal to over £85,000 in the £500,000 portfolio mentioned above – and that’s not even taking into account the fact that, by definition, model portfolios should have a higher expected investment return. For a personalised assessment, choose the sums and timeframes that apply to you using our fee saving calculator.
Simulated historic and future performance numbers should not be relied upon as an indicator of future performance.
The best of both worlds: bespoke advice combined with centrally-managed portfolios
Ultimately, everyone’s circumstances are different, and therefore financial advice and planning needs very much should be individualised. Independent financial advisers (IFAs) and advisers/financial planners from wealth management firms (including Netwealth) are ideally placed for this. But this role should never be confused or conflated with that of the personal investment manager.
A good adviser will take into account your circumstances, your current assets and investments, your risk profile and your financial needs and goals. The process should result in a well-considered financial plan to give you the best chance of meeting these needs and goals. This is likely to include different ‘pots’ to be invested via one or more risk-return profiles, while also keeping an eye on the implications of the overall allocations – and you would expect to pay separately for this valuable advice.
However, once the planning is done, the best placed people to manage the investments should take over, which is invariably the investment management team. Each pot should be invested into the appropriate centrally-managed portfolio, to ensure the money is being managed by the most skilled team for the job.
Meanwhile, you and your adviser can arrange periodic check-ups on your financial plan and make any necessary course corrections – truly the best of both worlds.
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Please note, the value of your investments can go down as well as up.
