Investment managers typically offer two charging structures. The first is a flat annual percentage with no dealing costs and the second is a dramatically reduced (typically 50% less) annual charge and a modest £25 fee per each switch. Some firms muddy the waters further by offering an annual fee to include all transactions, with both minimum and maximum amounts per trade.
A typical structure therefore may well be to charge an annual fee of 1.5% or 0.75% flat with a £25 switch fee. Given this choice many clients leap at the 0.75% option believing it to be cheap, not realising the impact that the £25 fee has both to the total costs and the bias it creates for the firm managing their money.
In the last two weeks of June we made a total of 13 sales and 7 buys as we restructured portfolios around either side of the Brexit vote.
One of the issues that investors fail to understand is that switch fees are charged on a “per line of stock” basis. This simply means that if you hold the stock (or fund) in your ISA, your general account or your bond you will be charged a switch fee for each. If your partner has the same number of accounts it will apply to each switch as well.
At Equilibrium we have just over 850 clients who collectively hold just over 4,000 accounts, so theoretically the switch fees over these two weeks would have been calculated as follows:
13 sales x £25 x 4,000 accounts = £1.3m
7 buys x £25 x 4,000 accounts = £0.7m
Total = £2m
I have absolutely no doubt that moving to this model of reduced annual fees would appeal to more new clients, and would also increase turnover and profitability.
However tempting it may be though, we will never do it. We have five guiding principles for fees – one of which is “no bias”. In the above example for each switch (sale/buy) we would earn a whopping £200,000. That’s too much incentive to switch. We want our clients to be 100% certain that if we are making a switch it’s because we believe it is in our clients’ interest to do so, either to reduce the risk or increase the return.
The information provided through the Equilibrium website is based on our opinion and is for general information purposes only. It is not, and should not be construed as financial advice.