Costs are too High and too Hidden in Private Banking

One major goal of our survey of the 20 largest private banks was to uncover the total costs of wealth management the private banking client has to pay, that for two reasons are widely underestimated by clients of wealth managers and private banks: Firstly, the official fees are mostly in the range of 1% to 2% per year and look rather small. However, over the years they add-up and will cut your return by 30 to 40% after a decade. Secondly, besides the visible stated fees clients have to pay fees for managed investment products in their portfolio such as mutual or hedge funds. Private banking clients are seldom aware of these costs and do not take them into account when assessing their total costs of private banking.

What we liked overall: Precise fees and openness for negotiations

• Precise fees: Half of the interviewed private banks gave a precise quote and another five private banks stated a flat fee plus ticket fee per transactions. We would prefer a clear cut offer without ticket fees. However, we liked that three-quarter of the private banks came out with a single number the private banking client can plan with. 

• Openness for negotiation:  Without even asking more than half of the private banks signalled the willingness to reduce their list price. We did not follow up on the signals, but think it is fair to assume that private banking clients could easily negotiate a reduction of 10% to 20%.    

• Explanations for managed products: The vast majority of managed products does not offset their management fees by a superior performance.  Of course the use of managed products can be justified if a fund is the only way to invest in an illiquid market. We liked that several private banks included their reasoning for suggesting a managed vehicle in their proposal. It would have been even better if private banks would include the yearly costs of using them as well. 

What we did not like overall: Intransparency and expensive products

• Deceptive packaging: From the seven private banks scoring highest for offering a low flat fee six had a far above average share of managed funds in their suggested portfolio. This is a somewhat deceptive strategy to suggest the private banking client has a very price-competitive offer. However, due to the high share of hidden costs he often pays more than with a higher flat fee, but less costly products in the proposal.
  

• Costs as “Performance-Killer”: Low fees and high hidden costs are deceptive and not client friendly. But it can get worse: A stunning number of five private banks scored very low on both dimensions, pushing the total costs in the range of up to 4% per year. Worst case was a huge international bank asking for a management fee of close two percent a year and suggesting a portfolio with an investment of 85% in managed products. This comprised mostly of funds issued by the bank itself. A real performance killer.
  

• Mediocre Funds instead of ETFs: The majority of funds we analyzed in the suggested portfolios could be easily substituted by ETFs, cutting the yearly costs by about a percentage point a year. This substitution would not hurt the performance. In fact often the index benchmark performed better than the funds.
  

• Intransparent proposals: A stunning 90% of the private banks did not provide any information on the costs of the suggested managed products. Many not even included an ISIN (International Securities Identification Number) of the vehicle to allow a private banking client to easier find information on the fund. Only one out of twenty surveyed private banks included in the appendix a description of all proposed managed funds, including the annual management fees. 
  

• Products as “black-box”: Three of the interviewed private banks did not disclose the products they actually plan to use. Instead they offered “black boxes”, labelled with fancy names like “Core” or “Satellite”-Portfolio. For each the private banking client receives a long list of asset classes and general investment vehicles that could be used at the discretion of the management. No detailed information was provided on the managed products used. The share of investments in managed products was missing as well. Overall this is a “wild card” for private banks to generate extra costs for the private banking client.

• Cut the Costs of Wealth Management
• Insufficient Client Focus – A Survey of European Private Banks