Dealing with Costs - Recommendations for Private Banking Clients and Advisers

In our mystery shopping study we analyzed the investment proposals we received from the top-20 European wealth managers and private bankers in respect to their asset allocation and cost structure. Both areas showed significant weaknesses and following we have compiled a list of recommendations for private banking clients and as well private bankers on how to deal with the costs: 

Recommendations for private banking clients:

• Choose the right management model for your needs: Private banking clients have to determine their investor type and right strategy to choose the type of wealth management best suited for their goals, capabilities and costs. Depending on the selected model, costs will vary considerably. An experienced investor can save money by only having an online bank to do transactions. An inexperienced investor requires more advice and will have to pay for it.
  

• Request transparency on fees and costs. Private banking clients should demand from their bank, as a requirement, a full disclosure of all hidden costs of the suggested products as well as kickbacks they receive from third parties. In many jurisdictions the private bankers and banks are even legally obliged to give a full disclosure of their kickbacks to the clients.

• Insist on cost effective products: Clients should challenge their private banker and ask for the benefits of the suggested managed products. Often there are more cost-effective index products with the same characteristics to replace them.
  

• Negotiate. Private banking is a “buyers’ market” and private banking clients should always negotiate on the rates first offered. They will improve their position by preparing themselves with offers from various banks and wealth managers, understanding the different cost drivers and communicating their requests precise and determined.

Recommendations for banks:

• No false packaging: A low flat-fee, but a high level of hidden costs might win private banking clients in the short term. However, it is certainly not a pricing model likely to establish a healthy long-term client relationship.
  

• Be proactive on transparency: The “good, old times” of clients reluctant to switch their bank and reluctant to challenge their private banker are over. Private banking clients get more sophisticated, shop around and will increasingly demand in-depth information on costs and kickbacks - supported by a legal environment pushing for transparency. Banks should not wait until they are asked or required to disclose information. Instead we recommend proactively telling the client about hidden costs and kickbacks and hereby gaining his goodwill.
  

• Offer cost-effective products. Clients get more critical of managed products like mutual funds and the associated costs. Whenever possible banks should propose cost-effective products, thereby showing their competence and increasing return as well as client satisfaction.
  

• Explain value and costs of managed products. Banks should actively provide private banking clients with their reasoning behind choosing a specific product and as well the associated benefits and costs.
  

• Clean up your pricing schemes. We have seen price lists requiring several pages to list every possible service, often differentiated by investment volume, kind of transactions and other variables. As a result private banking clients get confused and will loose overall trust. Make it simpler.