Kickbacks – The Way to Pay Your Wealth Manager and Private Banker Twice
Jul. 29, 2009
As a private banking client, you not only pay a substantial direct fee for your wealth management, but also indirectly for various hidden costs of products and services. However, while product issuers and private banks charge these costs, they actually do not keep them entirely. They give back a huge chunk to the middlemen and the investors to “encourage” them to choose their products.
These middlemen are usually wealth managers. Consequently, besides their role to advise their private banking clients on investment decisions, they often develop a second, often conflicting role, and source of income: selling bank services and investment products. And for performing these sales functions, wealth managers receive kickbacks and fees from banks and product issuers.
Kickbacks by banks: These kickbacks are in particular relevant for independent wealth managers who do not work for a bank. Often, they can choose the bank for their private banking client, and banks are willing to provide incentives to the wealth manager through kickbacks, so that his choice is influenced. As a result, every time the wealth manager buys/ sells stocks, funds, bonds, currencies etc. in the name of the private banking client, not only will the bank gain (from the transaction-fees) but also the wealth manager. The more transactions are performed, the more money the bank makes, and the more kickbacks go to the wealth managers. These are paid in addition to the kickbacks from the custodian fees he usually receives in any case. Overall, these kickbacks to the wealth manager can make up to 50% of what the private banking client pays to the bank. Additionally, for a first time private banking client a wealth manager directs to a bank, he often receives up to 1% of the investment amount as one time “Finder’s fee”.
Kickbacks by product issuers: A multitude of financial products are competing for investors. To make sure they find their way into the portfolio of an investor, product issuers depend on the recommendation of wealth managers. They not only have to persuade the private banking client to invest in managed vehicles instead of directly investing in stocks, ETFs, etc., but also to pick the “right” product for them. These recommendations are worth a lot to the issuers of mutual funds, hedge funds and structured products. Consequently, they pay kickbacks to the wealth manager for recommending their product. Normally, 90% to 100% of the front load goes into pockets of the wealth manager. Additionally, up to 50% of the money a private banking client pays the issuers through management fees, and pricing of funds and structured products, goes back to the wealth manager. As rule of thumb, the more complex a product is, the more money the issuers make with it - and so more kickbacks are paid.
If you are a private banking client of a bank rather than of an independent wealth manager, you might not be affected by these kickbacks of porduct issuers. However, banks, in their mixed role as client adviser and also product issuer, have various other levers to make extra money from your portfolio. This happens mainly by selling “in-house products” to the private banking client. By first issuing and managing a mutual fund or structured product, and secondly, by recommending them to their private banking clients, the bank can charge the same investment sum twice: First, through fees for the individual products, and second, as part of the “all-in-fee”. If private banking clients are not lucky, they pay a third time through missed gains, since most in-house funds perform worse than their benchmark.
Make sure you ask your wealth adviser for a full disclosure of the kickbacks he has generated from your portfolio. In various countries legislation has become more client-friendly and wealth managers not only have to inform private banking clients, but also pay back kickbacks they received in previous years.