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January 12, 2024

Are HNW wealth managers wading into an ‘administrative nightmare’?

Consumer Duty and CGT changes could create major challenges for managers who want to give clients value for money

By Rory Sachs

The lower CGT tax-free allowance set to be introduced in April could create challenges for discretionary fund managers and lower level HNW wealth managers wary of providing value for money for clients, it is claimed. 

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Robert Burdett, who serves as Head of Multi-Manager at Columbia Threadneedle in London, warns many fund managers dealing with client books in the low six-figures will have to weigh up the potential increased CGT burden for clients with the administrative fees they charge.

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In 2022-2023, the tax free allowance for capital gains was £12,300. But this fell to £6,000 in 2023-2024 and will fall to just £3,000 this from the new tax year on 1 April. 

The impact of the consumer duty framework on CGT

This comes against the backdrop of the Financial Conduct Authority’s new Consumer Duty framework, introduced in July 2023, which requires wealth managers to ensure they provide  ‘fair value’ for their services and ‘communications [clients] understand’. 

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This was reinforced by a letter sent in November by the FCA’s Lucy Castledine  to chief executives of wealth managers, imploring them to ensure that ‘products and services remain aligned to your consumer’s needs’ and that firms ‘consider the value of their products and services’. 

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Burdett tells Spear’s this raises two potential issues. Firstly, the requirement to ‘align with a consumer’s need’ might raise issues when a client does not want to be presented with ‘unnecessary tax bills’ caused by the change to CGT. Secondly, there will be questions over whether clients facing higher CGT bills are still receiving ‘fair value’, particularly given the administrative fees they already pay to have their money managed.

He continues: ‘For the broader wealth management market, with a focus on costs and Consumer Duty – on [avoiding] harm and value for money – I think it does make quite a significant shift in the hidden value for money of multi-manager, relative to an unwrapped portfolio service via a discretionary fund manager.’ 

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For example, if a notional portfolio of £200,000 yielded a 6.15 per cent return, it would generate £12,300 for clients – £9,300 of which would be taxable from April this year given the falling CGT tax-free allowance. At a CGT rate of 20 per cent, that could present clients with a tax bill of £1,860 if they chose to realise those gains. 

‘If you took a notional portfolio of £200,000 that £1860 new tax cost, assuming you crystallise it, is 0.93 per cent. That’s more than we charge for running that portfolio for the whole year, just with this one change,’ Burdett says. 

‘This is a problem for the whole wealth management market. I reckon most advisers of DFMs would be looking at around £200,000-plus for a cost-efficient portfolio, so everyone is going to be affected.’

HNW wealth managers will have to consider ‘value for money’ for clients

Burdett continues: ‘Obviously, the more you invest above that, the more likely you are to crystallise that gain just through normal portfolio activities. But I think it becomes a total administration nightmare for wealth managers. If their clients don’t want an unexpected tax bill they will need to have some way of administrating the conversation around that and recording it.’

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With the new Consumer Duty requirement, if there is ‘less activity in the portfolio’ to avoid higher tax bills, Burdett says, ‘the fee you’re charging that client for doing less is part of that value for money equation – so it’s problematic, I think.’

UHNW clients will have already been facing these challenges over the tax burden created by higher-value wealth management activities – and au fait with weighing up the value they are receiving for the returns they are getting. 

Yet Burdett says the CGT changes have brought the challenge to provide value ‘further down the HNW spectrum’. ‘And this is happening under a Tory government, so it’s unlikely to change if we see a change in government later this year,’ Burdett adds.

While using the services of a discretionary fund manager or dedicated relationship manager will be important for many HNWs, Burdett tells Spear’s that pooled investment vehicles can allow clients to plan their tax liabilities efficiently and allow investments to carry on unencumbered. 

‘[There are] lots of HNWs that set up their own mutual funds just for their family for that very reason, but to invest in an existing one is essentially the same. Less costly – less bespoke – but I think it [has] hidden value,’ he says.

These might also be useful for HNWs who are comfortable not having access to their funds for an extended period of time, such as if they were choosing to relocate to another country for several years. Burdett adds: ‘It puts the control of tax totally on the adviser and the client, to do it when it’s efficient.’

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