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July 5, 2011

Charge Card

By Spear's

How strange that entrepreneurs, a pool of society made rich by innovative business decisions, have been so slow to force through changes to their advisors’ fee structures

HOW STRANGE THAT entrepreneurs, a pool of society made rich by innovative business decisions, have been so slow to force through changes to their advisors’ fee structures. Too often, HNWs with deep expertise in a specific area are lost when it comes to distinguishing how well their wealth managers or accountants have performed and whether or not they are paying them appropriately.

Ironically, it is the lawyers, the camp who usually come in after the action has happened, who will experience change first in the form of the implementation of the Legal Services Act in October 2011. As Sophie McBain reports, the initiative aims to increase competition in the sector and improve access to justice by encouraging private companies to enter the legal market and existing firms to seek external funding. For an example of how the change will crystallise, your barrister (responsible for your interests in court) may join forces with your solicitor (responsible for the work either side of court).

This will have pros and cons. At best, it will drive down fees and improve convenience. At worst, it will put a premium on independent advice and jeopardise long-held relationships. Which happens depends on your political persuasion: if you are a free marketeer you might envisage that the market left to its own devices will equilibrate and produce the most efficient trading environment. Or if you are a regulation radical you might foresee companies acting more in the interest of short-term profits than long-term customer satisfaction.

Clues as to the answer come from different HNW arenas. Until recently wealth management fees were stuck in the 1980s and while your money man may not have dressed in the same pinstripe suit, he was charging you an annual management fee of 1 per cent plus an array of hidden charges. The cumulative effect was to swell the headline rate of 1 per cent to around 2.5 per cent per annum.

Thankfully, this trend has started to turn. While the Retail Distribution Review, an FSA-led overhaul of wealth manager remuneration structures, has formalised the shift away from commission-led models to fee-based ones, the change came not from above but from below. Post-millennium, a number of boutiques sprung up and gained a marketing edge by exposing the agency problems at the big banks. While their motives may not have been pure, the effect was transparency as the established houses were forced to clean up their acts.

The evolution is testament to the fact that increased competition lowers costs and improves service. What we need to see now — and what Spear’s thoroughly endorses — is a better deal for private clients, who have been taken for granted. Fairer fees, however they are calculated, are an important start.

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