Middle classes squeezed out of advice

The squeezed middle. The cost-of-living crisis. The cling-ons. Whatever term one chooses to apply, life is increasingly tough for Britain’s middle class. Whether they are having palpitations over private school fees or getting red-faced over retirement, many would agree they are more in need of wealth advice than ever before.

Clever financial planning and proper investment management can help offset the escalating cost of affluent (or even aspirational) lifestyles, but many find that their own financial circumstances mean they are unable to do some of the things they would like, particularly when it comes to helping children and grandchildren.

Anecdotal evidence suggests this accounts for up to a third of all withdrawals from managed wealth portfolios. But middle-class parents and grandparents are increasingly being warned that they might not be able to afford to help younger generations.

Laura Lambie, senior investment director at Investec Wealth Management, says: “People who consider themselves to be in the ‘squeezed middle’ often have pensions as a number one concern. If they want to buy their child a house, they often have to be careful they don’t compromise their own retirement plans.”

Seth Cowburn, head of wealth management at Duncan Lawrie Private Banking, admits: “We are having more conversations than ever with parents and grandparents, in which we warn them that their wishes to help younger generations may be unsuitable within the context of their wider financial plan. This can come as a big shock.”

The pressure on middle-class budgets in recent years has coincided with substantial regulatory upheaval in the industry, which has pushed up the cost of money management and forced clients and providers alike to think twice about whether it can be justified.

Mr Cowburn increasingly thinks not. “A number of firms take on people with as little as £100,000 to invest, but I struggle to see how that would be worthwhile. We only take on portfolios of £250,000 or more, because there’s a significant risk that the cost would outweigh the benefit with less.”

He adds that the “cost-to-serve” ratio across the industry has ballooned by at least a quarter over the past two years, largely as a result of tighter regulation which has forced companies to spend on extra technology, training and staff.

Britain’s soaring house prices may offer at least some hope for both the squeezed middle – especially at the younger end – and the wealth management industry. According to research from HSBC, one in five of 20- and 30-year-olds are likely to inherit legacies worth more than £250,000. That is enough to put them on the radar of more firms.

Many of those who have inherited investment portfolios choose to keep them going rather than liquidate them and blow the money on property, notes James Maltin, investment director at Rathbones.

“The freedom of renting and having a lot of money invested in equities now appeals to the majority of my young clients. The obsession with home ownership seems to be dying down,” he says. “These days, young people seem to prefer the freedom of renting – especially when they can easily afford a nice apartment. Their young age also allows them to take high risks in their portfolio, which means they can grow their wealth slowly but surely.”

However, relying on younger people mopping up wealth from older generations is a risky business strategy for the industry, not least because younger clients are not as quick to rush into the arms of a wealth manager as their parents might once have been. Growing numbers of young people are just as likely to seek help from family, colleagues and the internet instead.

A survey by NFU Mutual found that 42 per cent of 25- to 34-year-olds say paying upfront fees puts them off seeking professional advice, while 28 per cent think financial advice is only for the “wealthy”. Separate research from Oracle Capital Group suggests that 55 per cent of people think the term applies to those with £10m or more.

To capture future middle-class clientele, some companies envisage having to serve up no-frills wealth management, possibly scaling right back to basic financial planning to make their services affordable. But others disagree; JPMorgan Wealth Management research found its clients aged 35 and under expect to be contacted on a more frequent basis than their older counterparts – with almost 40 per cent wanting to be emailed every week.

Others companies say they will continue to rely on word-of-mouth recommendations and networking in the right circles to attract clients. Which approach will prove most successful at keeping the middle-class clients of today and attracting the new wealth of tomorrow, remains to be seen. Until then, the future scope of the industry remains uncertain.

Katie Morley is a personal finance writer at Investors Chronicle