Does your money manager pass the Ofsted test?

In the past year, many parents, including myself, have seen Ofsted downgrade their child’s school from “outstanding” to “good”. This is because Ofsted has actively chosen to make it harder for schools to get the top grade.

Raising the performance bar should apply to your investments too, especially if you’re one of the 2.4mn people in the UK who pay for wealth management.

A “mass affluent” person with the required £250,000 to £1mn or more needed to justify hiring a wealth manager is typically forking out 0.25 to 1 per cent of their investments each year in fees, with some firms charging as much as 2-2.5 per cent.

For thousands of pounds in ad valorem each year, I’d expect outstanding, not just good, and definitely not “requires improvement” or “inadequate”.

You should also demand outstanding investment performance even if you have less than the required minimum for a wealth manager and go instead to an independent financial adviser (IFA) with a portfolio of £50,000 to £100,000. Many IFAs don’t actually make fund selections or asset management decisions — they “outsource” this to the managed portfolio services of the same wealth managers, working directly for richer clients.

Discretionary fund managers (DFMs) style themselves as the crème de la crème of portfolio management: they charge hefty fees for their bespoke services, tailored to your personal circumstances, goals and risk appetite.

But a lack of transparency prevails — making it nigh-on impossible for customers to judge whether they are getting good value.

Let’s say your wealth manager has just related that your portfolio has dropped in value in 2022, a likely scenario. With retail prices inflation running at 12.6 per cent, magnifying the loss in terms of purchasing power, it’s bad news.

Your adviser is poised to “hold your hand” — reminding you that investing is a long-term pursuit and stock markets can have bumps along the way, it’s only a paper loss, and over the past five years your investment performance is in the green rather than red.

But take care. You only get one life and one chance at investing. If you wait too long to assess performance yourself it will be too late.

You might also rightly worry that the compounding of fees, over time, will transfer wealth from your pocket into theirs.

And now that we’re living in a permacrisis, it’s no time for 2022’s other new words, quiet quitting or splooting in relation to your investments, even if they are managed by a charming professional.

It’s essential to “Ofsted” investment performance at least once a year, spending preferably as much time as a car purchase — which typically takes nine hours.

First up is the peer group review. How does your DFM stack up against the competition?

You’d think DFMs would be delighted to have their clients scrutinise their performance. Unfortunately, most still share data only anonymously.

For years, all we had were private investor indices from the Personal Investment Management and Financial Advice Association (PIMFA), the trade association with 1,000 member firms.

Its MSCI PIMFA Private Investor Index series shows returns of five multiasset class strategies, determined by a committee. There’s also a newer MSCI PIMFA Equity Risk Index Series.

You can access them online to assess performance of your investment portfolio, and as a basis for discussing the asset allocation and structure of your portfolio.

They are useful comparators, but more transparency is needed.

A few organisations monitor DFM performance for IFAs, but don’t yet give direct access to the end consumer. Enter Asset Risk Consultants (ARC) which collects the actual performance of more than 350,000 investment portfolios from more than 140 investment managers who are responsible for around £1.5tn of assets under management.

It draws this data into an index series which you can use free of charge at suggestus.com. And for £25, you can buy a report that tells you if your performance has been good, bad or indifferent compared to a peer group.

While ARC names participating managers, it does not publish league tables, or release individual managers’ performance. Also, it can’t tell you the exact asset allocation because the indices are risk-based.

However, it is at present one of a handful of companies offering insight into the actual returns being generated by wealth managers.

The latest issue of ARC’s wealth index data, out this week, found the average return of the most common risk profile was down by 1.6 per cent over the third quarter of 2022. This ARC Sterling Steady Growth Index has around two-thirds of its exposure in equities with the rest in other assets such as bonds. In the first nine months of 2022, it’s down around one-third in real terms.

So far, we’ve looked at how the wealth managers want, or at least suffer, you to assess them. But I’d also compare their performance against what you would be doing on your own. That’s likely to involve a combination of cash and DIY investing.

From January 1 to September 20 2022, cash returned less than 1 per cent (0.9 per cent, as measured by the ICE Libor 1 Month GBP index, or 0.6 per cent from the Royal London Short-term Money Market fund). Or consider the best one-year fixed savings bond interest rate at the start of the year vs today — 1.41 per cent vs 4.6 per cent, according to Moneyfacts.co.uk.

Don’t just sit on the information, take action. Speak up and ask why your investment performance is poor

If you’re more of an armchair buy-and-hold investor, the bulk of your money would be in something you could easily select — probably a broad global tracker fund.

In this category, DIY investor platforms report that the £35bn Vanguard Lifestrategy Fund range is perennially popular. Among these, the 60% Equity fund fell by 13 per cent in the first three quarters of 2022.

You can also compare against how over 400,000 DIY investors fared on the Interactive Investor platform — its Private Investor Performance Index showed its average customer was down by — 12.95 per cent in the first nine months of 2022.

So that’s a handful of decent, though imperfect, comparators for your investment “Ofsted”. 

If you’re still happy, there’s no harm telling your manager about this due diligence — it will keep them on their toes. If not, don’t just sit on the information, take action. Speak up and ask why your investment performance is poor.

Other difficult questions include: Who is your ideal client? How many new clients do you take on each year? What is your latest investment philosophy?

After you’ve made them squirm a little, follow your gut instinct. “Good” might be enough if you trust them to do the best job they can.

If you believe your manager “requires improvement” or is “inadequate”, ask to exit. But watch out for fees.

While the Financial Conduct Authority hasn’t yet banned exit fees, you can mention the regulator’s new Consumer Duty requirements that exit fees must be reasonable and fair value. I’d argue a “lobster pot service”, where you’ve been lured in only to find yourself trapped for several years by a system of tapering exit fees — 6 per cent in the first year, 5 per cent in the second and so on, is unreasonable.

A good manager will be so confident of their offering that they will allow you to leave whenever you like, at no cost. If they won’t, that’s good grounds for a poor rating.

Moira O’Neill is a freelance money and investment writer. Twitter @MoiraONeill, Instagram @MoiraOnMoney