Wealth management: horses for courses

Where do you go for good advice on your personal finances? This is a question that even professionals in the financial services industry find difficult. An increasing number of individuals and small to medium-sized companies are turning to their accountants for advice and there isn’t always a neat answer.

According to Datamonitor there are between 100 and 200 firms offering wealth management or private-banking services in the UK. But most investment managers and brokers require the individual to have at least a couple of million in free assets to invest before they are even vaguely interested in running a portfolio of shares.

To make life even more difficult, it is virtually impossible to pick an investment manager on track record since neither private client stockbrokers nor private banks publish any performance statistics. Unless the firm has in-house unit trusts with published performance statistics, you have to take their word for it that they are good at investment.

‘Unless you have got at least £10m, you can’t get good advice on running a portfolio of equities,’ says Peter Hargreaves of independent financial adviser Hargreaves Lansdown.

‘If you think about it, why would a top investment manager want to manage private clients’ money? You wouldn’t expect the likes of Anthony Bolton (the hugely successful investment manager of the £4.8bn Fidelity Special Situations fund) to take on your personal portfolio. All the good fund managers get snapped up to run big mutual funds or institutional money.’

Hargreaves Lansdown manages some £4bn for clients, mostly in mutual funds, has an in-house stockbrokerage, advises big and small companies on everything from pensions to investment and was one of several firms to handle the retail marketing of privatisations for the government in the eighties and nineties.

It has 490 employees of which 40 are consultants registered with the Financial Services Authority. The firm works on commission and fees.

‘Many of our high net worth clients come to us because we advise on corporate pensions, and as part of the deal, we can also give free advice to senior executives,’ says Hargreaves. The firm has just advised Nomura on its corporate pensions and is also the largest purchasers of annuities in the UK, acting for WH Smith, Sainsburys, BT and Woolworths.

And Hargreaves says the firm is cheaper than most of the competition. ‘We restructured our business 10 years ago in the good times. As a result we are now able to work on very small margins. We have the cushion of trail commission from £4bn of investments on which we have advised.’

But Hargreaves is quite clear that accountants are going to have to take more interest in tax advice linked to investments. ‘When the new pension rules take effect next April, all accountants will have to understand the implications because virtually without exception, their clients will need pension advice on SIPPs and on how to protect their occupational pension benefits,’ he says.

Hargreaves Lansdown claims to be the fastest growing SIPP provider in the UK and like others is gearing up to cope with the huge interest that the new pension rules are generating.

The biggest difficulty in recommending any firm which offers personal financial advice is that it is virtually impossible to find it all in one place. Some of the big financial planning practices claim to be able to do everything from investment advice to mortgages, and Inheritance Tax planning to household insurance. But as with all things, you will probably get best advice from a specialist.

You will probably need one firm to advise on investments, possibly another to act as a pension and employee benefit consultant, and perhaps an insurance and mortgage broker too.

For example, Charcols, Savills Private Finance and Chase de Vere Mortgage Management and are among the best and largest mortgage brokers, able to negotiate favourable terms for their clients, many of whom are high net worth individuals, or have unusual requirements because they run their own business or are self-employed.

The average deal at broker Savills Private Finance is over £300,000 and clients wanting mortgages of several million are commonplace. ‘The biggest deal we have done on a single property was a £14.7m mortgage on a central London home,’ says Melanie Bien of Savills Private Finance.

But none of these firms are big in investment management or pensions. ‘When clients ask for investment services we refer them to private client stockbroker Killik & Co,’ says Bien.

Similarly, Hargreaves Lansdown, which is big in investment advice if you are looking at unit trusts, pensions, and execution-only stock broking services, no longer offers insurance broking. ‘We found that it just didn’t fit with the rest of our business and so we agreed to a management buyout,’ Hargreaves explains. ‘But we still do some household insurance.’

Investment broker Patrick Connolly of John Scott & Partners has built ties with firms of accountants. ‘We get 50% of our business through professional introducers like accountants and solicitors,’ he says. ‘But we are a fee-based IFA and work with the professionals on a reciprocal basis – we get referrals from them in return for which we refer investment clients for tax or legal advice.

John Scott & Partners also advises large and small corporates and has two household name life assurers on its books, where it advises employees, as well as a big publisher and a national parcel delivery service. ‘Sometimes we pick up the corporate business because we are already advising senior executives,

other times we get the employees as clients because we have been called in to advise the firm on employee benefits and pensions,’ Connolly explains.

The firm has £550m of discretionary funds under management and unlike Hargreaves Lansdown, is prepared to run portfolios of shares for smaller investors with upwards of £100,000 in free assets.

But while asset allocation will be agreed individually with a mix of equities, gilts and bonds, property, venture capital funds and so on, the equity and bond content will be pooled with other clients and managed as one portfolio. What you are getting is an in-house mutual fund. ‘Most of our clients are in a fund of funds,’ Connolly admits.

John Scott & Partners has 200 employees, of which more than 50 are consultants, registered with the FSA. Fees range from £207 an hour for a full review by a consultant to £92 an hour for a para-planner and £70 an hour for the administrative assistants who do the paperwork.

Both John Scott & Partners and Hargreaves Lansdown produce a range of publications dealing with everything from SIPPs, to asset allocation and even shareholder perks, one of Hargreaves Lansdown’s most popular publications.

Most of the large accountancy practices have in-house financial planning divisions and investment management subsidiaries providing fee-based advice and this is a fast growing area of business. The difficulty here is that individuals can baulk at minimum fees, which can be as high as £5,000 a year.

Smaller firms of accountants may also be concerned that if they recommend the financial planning and investment services, they will lose the tax and accountancy brief. This is not a problem with the IFA firms, since only a few, like Rathbones, offer accountancy services, and minimum fees are much lower and can easily be less than £1,000.

One of the best known in offering a range of specialist financial services to high net worth individuals is accountant Smith & Williamson, the eighth largest practice in the country. It has more than £6.5bn of clients’ funds under management, making it one of the largest private client investment managers.

But Smith & Williamson typifies the problem for anyone wanting to find everything in one place. While is manages a large amount of private client money, its two actively managed UK growth unit trusts have been below average performers.

Grant Thornton is typical of the bigger practices moving into personal financial planning. ‘We are holistic financial planners,’ explains Ann Bristow, who heads the firm’s operation. She feels accountants are in a strong position to offer personal financial services on the back of tax advice.

With 28 certified financial planners, the firm can offer a wide range of services. It has recently appointed five new experienced advisers to its financial planning practice on the back of growing demand and a 20 per cent growth in fee revenues for 2004/2005. ‘The firm now has more CFPs than any other advisory firm in the UK,’ says Bristow.

‘We have an in-house investment management team and we are able to produce an asset allocation model which reflects the individual’s risk profile. But if a client wants a choice, we organise a beauty parade of potential investment managers. Many clients are referred from the accountancy practice,’ she says. ‘And many run their own businesses.’

Given the fragmentation of the market in financial advice, where do you start? Taking a personal interest is probably the best course of action. ‘We find that many clients who have run their own businesses want some involvement themselves when it comes to managing their money,’ says Hargreaves. Many make use of the cheap execution-only stock broking facility, which the firm offers.

Given that less than a third of professional investment managers ever outperform their relevant stock market benchmark index, you might as well make your own mistakes – or invest in an index fund. Many professional investment managers effectively run an index fund with 80 per cent of the money, and actively manage only 10 or 20 per cent.

Private client stockbrokers pay lip service to individual investment management, but many offer only discretionary portfolio management, where the broker manages the portfolio.

Few will take on new advisory clients unless the portfolio is at least £500,000 to £1m, and up to £100,000 you will generally be recommended to hold a selection of mutual funds to give a spread of risk. However, a good private client stockbroker will be knowledgeable about mutual funds.