How the Sticker Price Misleads Private Banking Clients
May. 29, 2009
Trying to buy the “wealth management” service is as cumbersome as buying a car. To get a good deal a client has to compare different offers, try to understand the ongoing costs, the amount of kickbacks the private banker or wealth manager gets from the manufacturer, what extras are included and which others have to be paid for additionally. Finally the client better be prepared to haggle about the price with the private banker too.
It all starts with the “sticker-price”: The price is often quoted as yearly “flat-fee” or “all-in-fee”, calculated as a percentage of the assets under management. The wording conveys that this should be a simple and “no headache” solution for the client.
Beware! This is not really the case for two reasons: First, there is no clear definition as to what services of the private banker are to be included in a “flat-fee” or “all-in-fee”. Some banks, private bankers or wealth managers charge for extra services such as legal and tax advise while others introduce additional costs like a “ticket fee” charged on top of every transaction. Second, and more significantly, the selection of the products by the bank, private banker or wealth manager will have a huge impact on the real total costs that the client has to pay.
Most private bankers use managed products for the diversification of the investment. Such products may be mutual funds, hedge funds, structured products or similar securities. For the management of each of these products the private banking client will pay an extra fee to the fund manager, normally deducted directly from the assets under management (and therefore pretty well hidden because the client never sees an invoice). These management fees for mutual funds range from 1% to 2% a year and for hedge funds up to 5% and more. Depending on the share of managed products in the client’s portfolio the total costs will rise significantly. Of course, these costs of managed products are not included in any kind of “flat-fee” or “all-in-fee”.
Our research indicates that a substantial number of banks, private bankers or wealth managers quoting a relatively low “flat-fee” are overall more expensive to the clients since they typically stash a lot of managed products in the client’s portfolio. On top of all this, the bank, private banker or wealth manager usually receives kickbacks from the product issuers. For private bankers with comparatively high “flat-fees” we have found that they tend to have less managed products and are often cheaper on the whole than banks with lower “flat fees”.
Unfortunately for the client low flat fees and a low share of managed products are still offered only by a small minority of the banks, private bankers or wealth managers.