Regulator has consistently missed opportunities to scrap early withdrawal charges
The UK’s largest wealth manager St James’s Place’s announcement that it will scrap its exit fees is long overdue. But it’s hard to call this either a victory for consumers or an outstanding achievement for the regulator.
Exit fees are wrong because they are barriers to leaving that allow financial firms to grow complacent. They increase customer inertia, meaning there’s no reason to improve service or innovate products.
These charges, once common across the industry, are generally on the decline but, as SJP demonstrates, they have not gone yet. The blame for delay lies firmly at the door of the Financial Conduct Authority, the regulator, which considered plans to ban exit fees four years ago but then dropped the idea.
The FCA missed a chance to put things right in its Consumer Duty launched in July, watering down the rules to a ban on “unreasonable” exit fees.
In the end, it should be the customer who decides if the fee structure is acceptable. So, if you’re with St James’s Place, think carefully about staying with a firm that is only belatedly caving in to pressure to do the right thing by its customers.
SJP has more than 900,000 clients, serviced by 4,766 qualified advisers. Until now, the business has levied an “early withdrawal fee” of up to 6 per cent on pensions and bonds money, reducing on a sliding scale over six years.
In July, SJP’s then chief executive said these exit fees that aren’t called exit fees were not “unreasonable”. After a few weeks and several chats with the regulator, the charges will finally be scrapped. The new man in charge has his work cut out implementing some dramatic changes.
But remember that the barrier won’t be lifted until mid-2025. Before that bond and pension customers will remain on that sliding six-year scale. Rob Dix, author of The Price of Money, says: “The fact that SJP has accumulated £150bn of customer funds with such an uncompetitive fee structure (and limited fund range) suggests many people aren’t confident in asking the most basic questions about how their money is managed.”
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SJP says it has a “substantial programme of system and process changes” that’s delaying the removal of exit fees. Is it worryingly cumbersome technology or bureaucracy, or perhaps both? Either way it’s hardly reassuring.
If you want to be informed on SJP, a quick internet search will reveal stories about charges, accusations of opulent corporate spending, and underperforming funds.
The investment platform Bestinvest’s “Spot the Dog” report reveals the funds that have consistently underperformed in each of the past three years and by 5 per cent over the whole period. In the latest edition, who had the highest number of “dog funds”? Yep, it’s St James’s Place. Of the £46.2bn held in the 56 poorest performers, £29.3bn was in six SJP funds.
To be fair, SJP says it is trying to fix underperformance with the recent appointment of a new chief investment officer and director of research. The wealth manager says: “We are continually evolving our funds with the aim of driving excellent long-term performance for our clients.” It would do well to offer clients a wider range of funds, not least from better-performing investment groups, and maybe some low-cost passives.
Despite all the criticism, SJP continues to rank highly with its customers on reviews website Trustpilot and on adviser search website VouchedFor. It’s a puzzle for me that so many have stayed with the company and new customers continue to sign up.
Maybe they are guided by those online reviews? If so, they need to dig deeper.
On the plus side, SJP announced plans to reduce the initial charge on its pension and investment products from a maximum of 6 per cent to 4.5 per cent of assets.
However, it is tweaking the ongoing charges, also levied as a percentage of assets, so that customers will actually pay a bit more in the first six years and less later.
SJP says it’s all simpler now — but it still looks very complicated to me.
While these fees remain common enough in the industry, the practice is declining, as more go-ahead advisers switch to charging flat fees for work done. They’re responding to customer demand: SJP has missed a chance to follow suit.
James Baxter, founder of wealth manager Tideway Wealth, says: “St James’s Place . . . has a business model that looks like a 1980s Ford Cortina. If someone wants to give you money, you don’t put barriers in the way.”
Maybe you still use CDs and video tapes? It’s fine if you do. But some of us have moved to Spotify and streaming services. We like electric cars, not Ford Cortinas.
I like to think a “modern” customer looks to keep fees low and sees charging up front for new money as archaic — and restrictive. Due to the effects of compounding, initial charges — whether for product or advice — take bigger bites out of your portfolio every year, often wiping out the growth.
I think this week’s news might prompt at least a few SJP clients to consider moving out — despite the company’s changes and promises to improve investment performance.
But if you want to leave SJP (or any other financial company that still charges exit fees), you might want to try moving without paying them. Don’t be polite. Some readers report that a strongly worded letter does the trick.
If you do switch, you’ll face the problem of where to move. SJP is by no means the most expensive wealth manager out there, though comparisons are difficult as the information is not always clear. The FCA found in 2020 that the average charges were 2.4 per cent of the amount invested for initial advice and 0.8 per cent per annum for ongoing advice. The regulator expressed concern about the level of ongoing charges.
Even 2 per cent is enough to wipe out at least 40 per cent of your investment returns over 25 years, if portfolio growth is 5 per cent. I suggest you consult the investment charges impact calculator at website Candid Money.com.
Schroders’ 2022 UK Financial Adviser survey found 73 per cent of advisers levy average fees (whether percentage-based or flat) of between 0.5 per cent and 1 per cent of assets. So there are plenty of cheaper options around. You can look carefully at unbiased.co.uk.
As with most things in personal finance, it pays to read the fine print.
Moira O’Neill is a freelance money and investment writer. X: @MoiraONeill, Instagram @MoiraOnMoney, email: moira.o’neill@ft.com.
The article has been amended since publication to include FCA data on charges.
You can read the full article here.
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