Nearly seven in ten asset manager firms failed to provide the underlying fund costs to a prospective new client in initial discussions, a mystery shopping style probe found.

Ahead of the FCA Asset Management Report this Wednesday, SCM Direct carried out research into key areas being reviewed by the regulator.

The company, led by Gina Miller, claimed the results showed UK wealth managers “continue to significantly mislead clients on charges, and may be breaking FCA rules”.

SCM Direct said it conducted a mystery shop of 31 leading UK wealth managers, with total assets managed in the UK alone of over £440bn, who were asked four basic questions for a £1m+ potential new client.

SCM Direct asked the 31 firms: What are all the charges including the investment charges or anything else on this £1million?

The answers were:

• Overall 69% of the managers that provided a headline fee, failed to include VAT or the underlying fund costs within their initial email even when one or both of these additional costs by clients
• 91% of the managers who responded, failed to show their costs in £ (as will be required by MiFID II from 3rd January 2018).
• 52% of the managers who responded refused to add up costs together, even when explicitly requested to do so in a subsequent email
• 38% of the managers who responded and whose services are subject to VAT, failed to include this cost within their headline charge within their initial email
• 45% of the managers who responded and who invested in funds, failed to include any underlying fund costs within their headline charge within their initial email

The researchers found that most managers revealed just part of the transaction costs, sometimes including the commissions paid to external brokers or to themselves, but rarely the stamp duty on shares or the market maker bid/offer spreads.

The SCM Direct report stated: “The format for most of the wealth managers replies were highly confusing and difficult to understand – even by a professional investor, which made comparisons virtually impossible.

“Despite extensive emails, SCM Direct found it practically impossible to deduce which costs the manager had included. However, we did find that the initial ‘headline charge’ was frequently misleading as it would often exclude VAT, underlying fund charges, commissions charged by the fund managers, and many other elements of transaction related charges.”

The 31 well-known firms’ responses to the questions were as follows:

Is £1 million a level you take?

13% did not respond to the email questions within a calendar week
11% said a £1m+ investor was below their minimum investment level

How you would invest my money – what type of shares / bonds / funds or investments? How it would be allocated?
38% of those who responded were unable to indicate how the money would be invested, within 7 days.

What kind of returns can I expect – ideally, I would like to earn over 7% pa after costs – is this something you can guarantee?

57% of the managers who responded provided an indication of expected return.
The average expected return was 7.1% pa.

100% of respondents correctly said that they could not guarantee a return.

SCM Direct described this projected estimated return of 7.1% after fees as “totally unrealistic” given the prospective client told the wealth managers that they ‘would expect something like 70% invested in stocks and 30% in bonds or cash’.