How much should a financial adviser be paid to move your money to a new investment service? According to the UK's largest insurer and money manager Aviva, it could be up to a staggering 10 per cent of your funds.
Aviva is offering independent financial advisers (IFAs) up to 10 per cent of their clients' entire assets, potentially including cash in their savings accounts, in return for moving them on to its new portfolio system – even if none of the underlying investments change.
Apart from the adviser's own charge, Aviva receives an additional 0.5 per cent just for placing the customer's funds on its system. In addition, the switch allows the insurer to levy an annual management fee of 0.55 per cent. In effect, a fairly simple electronic transfer of £100,000 in funds from one system to another, several hours' work at most, could leave an investor facing combined charges in the first year of more than £11,000.
The deal has been condemned by many advisers as potentially opening the floodgates to mis-selling, along the lines of the pensions and endowment scandals of the 1980s and 1990s, when millions of consumers were sold inappropriate products by commission-hungry salespeople.
Julian Stevens, at Harvest Independent Financial Management in Bristol, says: "If this isn't an open invitation to intermediaries to overcharge then I don't know what is. Most would be reluctant to do so, I suspect, but for the rogues who have no scruples it seems to be a decidedly unsavoury development."
His comments come as Aviva unveiled its new "wrap platform" last week, marking the company's second attempt to corner a slice of the growing market for electronic portfolio management. An earlier unsuccessful attempt in 2004 is reputed to have cost Aviva more than £100m.
Other industry experts accuse Aviva of paying excessive commission to catch up with their rivals. Justin Urquhart Stewart, director of Seven Investment Management, one of the first companies to offer such a service in the UK in 2001, says: "They are trying to buy market share, but normally you will find that they can't do that and be successful at the same time."
The charge of potential mis-selling is strongly denied by Aviva's head of wrap services Nick Burton: "Any remuneration is between the adviser and the customer to agree first. Our experience to date is that almost all our advisers charge between 1 and 3 per cent for transferring a client's assets on to our platform," he says.
Burton claims that the need to offer advisers a maximum of 10 per cent for switching is determined by new rules from the City regulator, the Financial Services Authority (FSA), whereby commission payments are banned after 2012. In return, advisers and clients must be given as much choice as possible on potential fees they can levy, even if they opt to take much lower ones.
He cites Standard Life, whose total switching charges can run to 8 per cent, as another insurer acting "in the spirit of the FSA rules". However, Mark Polson, responsible for wraps at Standard Life, says such a charge would be almost impossible: an adviser would have to lay claim to every one of the company's different charging options, including up to six years' worth of future annual fees. "We don't need to use the FSA to justify our payments to IFAs," adds Polson.
An FSA spokeswoman says: "If a deduction is made from a client's assets, product providers [should] offer sufficient flexibility to facilitate the adviser charge agreed with the client." However, she adds: "[We want] product providers to monitor the effect of the charge and provide details to the FSA, [allowing us] to deal with excessive charging."
In recent years, wraps have become fashionable: from a near-standing start in 2000, at least £35bn in funds is now thought to be held in such schemes. Most of that money has been placed there by financial advisers, who argue that if used correctly they can make planning their clients' finances much easier.
Arthur Childs, at Cranleigh-based Arch Financial Planning in Surrey, says: "One of our jobs has always been to prepare a regular valuation of clients' assets, at least annually and sometimes every six or even three months. It was taking us between five and six hours to do each one, reconciling different ISA and pension investments, as well as life funds. "A few years ago, we became involved with Nucleus, a wrap platform set up and developed by IFAs themselves. This allows us to create something that is shaped by our needs and those of our clients."
Clients can go online daily to see how their assets are performing. Through Nucleus, advisers can also place their clients' money into "model portfolios" based on their individual risk profiles, using fund rating services provided by Old Broad Street Research, Ibbotson Associates and Morningstar.
Nucleus charges 0.35 per cent of a client's assets a year. On top of this the IFA receives up to 1 per cent of their client's portfolio, while the fund manager is paid a fee averaging about 0.7 per cent. This total of around 1.7 per cent compares reasonably with a standard unit trust charge of about 1.5 per cent – although Childs argues that the quality of service received by the client is infinitely better.
Other services include Bath-based Novia, which now has 250 advisers using it and won an industry award last year for the best new wrap launch.
Ken Taylor, a financial adviser at Scottish advisers Mackenzie Taylor Wealth Management, based in Nairn and Glasgow, says: "My own background is in accountancy and what makes a wrap attractive is its transparency: there are no rebates or smoke-and-mirror charging structures and we don't deal with 'mirror funds' where an extra charge is tacked on."
In the past two years, Taylor says he has shifted upwards of £7m of clients' money on to the new Novia platform, subject to their agreement: "If they were on another platform we charge nothing and [Novia] waives any initial charge, so it is like a re-registration. For a new client, we would take a pragmatic view and either charge nothing or perhaps 1 per cent as there would be a fair bit of work involved."
Bill Vasilieff, chief executive at Novia, says: "In our experience no IFA takes more than 2 per cent for transferring assets on to our wrap. We believe it is more than enough. Transparency is vital: the worrying thing about platforms is if some [companies operating in this] space start hiding things again. We must not get into a situation where customers become disillusioned again."
Wraps: The lowdown
At its simplest, a wrap is a "wealth management" facility, providing an investment service for a client's entire portfolio of assets, including ISAs, pensions, bonds, life funds and shares, as well as funds not held in tax-free shelters. Many wraps allow cash accounts to be placed in them, as well as investments such as "exchange traded funds" (ETFs).
The key attraction of a wrap is that the user can view all their assets in one portfolio. Online technology means the value of their entire holding is updated daily and can be accessed at any time. The most sophisticated wrap platforms can break down an ISA or pension fund holding into many constituent parts, including geographically, by industry or sector.
In turn, a financial adviser can use sophisticated asset allocation models to decide which funds to sell or buy, or rebalance a portfolio at any time. This offers the potential to deliver the same returns while reducing the client's risk profile, or improve returns while maintaining the same level of risk. Switching between funds is usually free. This can significantly enhance investment performance. A recent survey by the insurer Skandia found that constantly maintaining the right asset allocation could have improved a portfolio's performance by 16 per cent in the past decade.
Wraps are generally transparent in price. Instead of many different confusing charges, a client usually pays a combination of three sets of fees: up to 0.5 per cent to the wrap platform, about 0.5 to 0.7 per cent to the underlying fund manager and around 1 per cent to the IFA. The total usually hovers around 2 per cent.
Case study: 'Paperwork has never been my strong point'
Robert Smith, 48, is a successful businessman but messing about with statements from pension and investment providers is not for him: "I've spent my whole life wheeling and dealing, but paperwork has never been my strong point," he says. It was this aversion to paperwork that led Robert, right, to set up a wrap account with his IFA, Ken Taylor at Mackenzie Taylor Wealth Management. "I used to own a builders' merchant business in Inverness and sold out one or two years ago to a national chain," says Robert. "I had financial 'stuff' all over the place. But being busy I tended to forget where everything was."
It was through Ken that Robert agreed to place his assets – which include personal pensions with M&G, Jupiter and Invesco – on Novia's wrap platform. The rest of his funds are either in cash for easy access, or commodity-based ETFs.
He says: "Everything is now consolidated. I can keep an eye on how my investments are doing daily. The more I speak to Ken and the more I watch, the more I understand how stock markets work. It gives me more of a feel of personal involvement and confidence in my investments."