Is today’s wealth management Industry …. just as deceitful as the tobacco industry of the past?

I was reading an article online by Kathleen Michon J.D. about  the first reports linking cigarettes to cancer that emerged in the 1950s.  This lead to plaintiffs to start suing cigarette manufacturers. Plaintiffs in these early cases, usually smokers with lung cancer,  typically employed several legal theories in their lawsuits:

  • negligent manufacture – the tobacco companies failed to act with reasonable care in making and marketing cigarettes
  • product liability – the tobacco companies made and marketed a product that was unfit to use
  • negligent advertising – the tobacco companies failed to warn consumers of the risks of smoking cigarettes

Tobacco manufacturers responded in full force, fighting each lawsuit and refusing to settle out of court. They relied on several defence strategies, arguing that:

  • Tobacco was not harmful to smokers.
  • Smokers’ cancer was caused by other factors.
  • Smokers assumed the risk of cancer when they decided to smoke.

The tobacco companies prevailed in all of these early lawsuits.

In the 1980s, a new wave of lawsuits emerged. In the landmark case of that time, Cipollone v. Liggett, the plaintiff and her family alleged that cigarette manufacturers knew — but did not warn consumers — that smoking caused lung cancer and that cigarettes were addictive. Although Rose Cipollone’s husband was awarded $400,000, an appellate court reversed the decision. Other plaintiffs also sued, claiming that tobacco companies knew cigarettes were addictive and caused cancer.

In defending these lawsuits, the tobacco companies argued that smokers had knowingly assumed the risks of cancer and other health problems when they began smoking.

As I was reading this, I could not help relating this story to the Financial services Industry.

The general public pass on their wealth to the Wealth Management Industry and they hope that those in charge of their money are acting in their clients best interest. After all, the whole purpose of investing is surely to create additional wealth in the most cost and tax efficient manner possible. The Financial advertising over the past two decades has gone to great length’s to highlight how dependable and trusting these big financial institutions are…. but I ask the question… “What if these wealth management companies know they are:

  • negligent in manufacture – they don’t declare all the charges embedded in their funds or disclose that information in their marketing
  • product liability – the wealth management industry fails to warn consumers that these high charges severely damages investors wealth
  • negligent advertising – the wealth management industry fails to warn consumers of buying products with high charges damages wealth

The wealth management industry will respond in full force, fighting each claim, with a counter claim of:

  • High fees are not harmful to investors wealth
  • Damage to investors wealth is caused by other factors
  • Investors knew the charges they were paying when they signed the contracts therefore understood he risks.

To date, the Wealth Management Industry because of their size and marketing power have survived.

But I believe we are at the forefront of a seismic change in the Wealth Management Industry. Wealth that belongs to you, is systematically being taken from your pension and investment accounts unnecessarily, transferring your wealth from you, to the financial services industry. I believe now is the time to stand up to the industry and take back power and have control of your money.  An article came to my attention published in the Financial Times on the 27th November 2016 with a headline ‘FCA takes a hard line on asset managers’. The Financial Conduct Authority (FCA) has recently conducted a review in the active fund investment arena and looked at 722 funds from 15 asset managers, representing £563 billion of retail assets.  The outcome was that the FCA publicly stated that:-

Actively managed funds do not outperform their benchmark after charges and both fund investment objectives and fee breakdowns are unclear to investors. Additional ongoing charges can add significant amounts to the cost of a fund and we saw some small funds with charges of up to 0.9% in addition to the AMC. Using the AMC could therefore result in retail investors finding it difficult to accurately compare charges and potentially underestimating the cost of some funds.’

They go on to say ‘Some investors are unlikely to ever drive value for money effectively and therefore need strong governance to act on their behalf. Currently this does not appear to be happening, contributing to limited price competition for actively managed funds, asset managers being less effective at controlling more complex costs and specific funds not clearly communicating their investment strategy to investors. This results in investors choosing funds that are unlikely to meet their expectations.’

This is a clear statement of intent to change how these wealth management companies run their future business objectives. However, I believe their statement could also be construed, as these companies have been relying on the status quo, continuing to generate their fees and providing a mediocre service, quite clearly, having no regard to their client’s financial outcomes.

If investors suddenly realised how much of their money they give away and the negative effect this has on their lives, like the tobacco industry of the past, would they suddenly start to question the legality of what they have been sold?

Let us look as this example of  investors with various degrees of wealth, which they invest in Company A charging the industry average of 2.2% and Company B charging 1.1%. Both companies average 5% growth per year over 25 years and offer the same consumer protection and lets look at how performance and compound interest impacts on their long term wealth.

Amount of investment Company A 2.2% fees Company B 1.1% fees Profit being wasted
£100,000 £206,436 £274,316 £67,880
£250,000 £516,091 £685,790 £169,699
£500,000 £1,032,181 £1,371,587 £339,406
£1,000,000 £2,064,623 £2,743,161 £678,799
£10,000,000 £20,643,623 £27,431,615 £6,787,992

Take a moment to consider how much money you have invested in your pension and investment portfolio and ask yourself why are you wasting so much profit unnecessarily.  Ask yourself:

  • Did your wealth manager offer you the choice of a high fee or low fee investment strategy.
  • Explain to you in a manner that you could fully understand and identify the impact that high fees has on your portfolio value.
  • Did you understand at the point of sale and were you fully prepared to give away hundreds of thousands of pounds over your lifetime to your wealth manager, when more financially efficient options were available.
  • If your wealth manager had your personal interest at heart, would they not have informed you of this information… if not why not?

Be warned…Investment and pension funds are riddled with the wealth management disease. If you would like a complimentary health check to see if your portfolio or pension is diseased please get in contact.

One day the Industry is going to carry risk warnings on every new contract stating ” High fees damages your wealth.” Make sure yours is in the best of health…. be warned, like time time, profit can never be recovered!!!

 

 

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