Negotiating your wealth management fees

We are sure there have been times when you’ve heard a recommendation from an advisor and wondered what was really driving it? We are going to reveal some of the true motivators for your wealth management firm or private bank. The things that clients sometimes don’t know, but we think you should. In the first of a series called Wealth Management Insights, we look at the important topic of fees.

Naturally, everyone needs to earn a living and wants to be paid fairly for their efforts. We are sure it’s the same for you, in your business. But – we suspect – you’d like to know what you are paying, and why? Unfortunately, advisors are not always good at providing complete transparency.

New regulation might have helped

For clients advised by firms in the European Union (including the UK for this purpose), the Markets in Financial Instruments Directive (MiFID) has certainly driven some transparency. In its original iteration, implemented in 2007, there were important steps to make commissions – otherwise known as inducements – transparent to clients. The more significant changes came in 2018, with the implementation of MiFID 2. With these regulations, it was no longer possible for advisors to receive commissions on any products – all advisory fees had to be charged transparently and had to be agreed with the client upfront.

Although, new regulation might (sadly) not have been enough

That all sounds good – transparent fees for advice. Although, that doesn’t tell the whole story. What if your relationship is with an advisor outside the European Union? It is likely that such transparency does not apply, and it is possible that your advisor is not fully disclosing the fees that they receive for recommending particular products. Indeed, their advice may be biased by products that attract higher levels of commission. The commonly used jurisdictions, outside the European Union, that offer some levels of protection against this practice are Singapore, Switzerland and the United States, but care should be taken nonetheless even in these, and the appropriate probing questions need to be asked. Outside of these jurisdictions and the European Union, the risks of being mistreated are very high indeed in the other usual wealth management locations.

Back in the European Union, another recipe for fee confusion arises when a client is upgraded from being a retail client to a professional client. Retail clients attract much higher levels of statutory/regulatory protection which should not be sacrificed lightly. There may be an incentive for a client to upgrade to professional status to access more sophisticated institutional-style products, but any client should challenge themselves over the necessity to do this, given the protection lost. Another by-product of professional status is a relaxation of the rules around fees. Whilst these still need to remain fair, they do not need to be fully transparent – indeed, the regulatory perspective is that as a professional you should be able to calculate the level of fees, and challenge if necessary. For many reasons, this is often easier said than done.

Finally, whether in the European Union or not, whilst the fees for advice might be transparent, product manufacturing costs may be less so. In particular, where the institution you are dealing with is both advisor on and manufacturer of the product you are using. To start, there many an incentive for an advisor to recommend the product manufactured in-house, leading to higher fees for the institution. Yes, there could be a requirement to provide best advice (i.e. to only recommend an in-house product if it is supposedly the best), but there are many tests and dimensions as to whether a product is truly best. It is critical to cut through the marketing literature. Then, there is the question of hidden fees. These are especially prevalent with structured products or foreign exchange instruments. Here, the investment bank division of your wealth management advisor might be embedding a plethora of fees for structuring or use of its balance sheet. It is critical to analyse whether these are reasonable.

Absolute levels of fees need to be reasonable, and you can negotiate

Even when fees are fully transparent, they need to be reasonable in absolute terms. In a low inflation, low interest rate, low return environment where a balanced portfolio might only achieve 5% or 6% per annum, a fee of 1.2% per annum might be 25% of your total return.

Then, there are potential embedded fees in funds, structured products or foreign exchange instruments on top. How do you stop fees being a drag on your total return? After all, paying unnecessary fees of just 0.2% p.a. over 10 years on a USD25m portfolio, equates to USD500,000 – wouldn’t you rather those funds were in your own pocket or perhaps that of a charity, rather than supporting a bank’s shareholders?

·       Firstly, establish your fee landscape. Whatever the size of your portfolio, this should never be above 1% per annum, and should more likely be between 0.3% and 0.6% per annum depending on the services offered. Study the websites of firms you are considering, consult friends and colleagues, consider engaging a firm to support you with selecting the right firm

·       Approach a range of  different banks or advisory firms that will offer the required services and find out what they would really charge for the size and complexity of your portfolio. Do not settle for the official tariff. In certain circumstances, discounts of up to 60% might be achievable

·       It is critical to watch out for additional or hidden fees. These fees come in many forms: introductory, initial, custody, safekeeping, cash management, payment transfer, account, relationship, brokerage, transaction, structuring, minimum, exit and closing fees. It is important to simulate your activity over the year and calculate the true fees that you will incur, including all the different types of fee. When you compare different firms, make sure you are comparing like with like

·       Then, consider the actual assets or instruments that you will hold in the portfolio. There is a greater cost to holding particular instruments – an active equity fund might have total costs of 1% per annum versus 0.3% per annum for a passive fund, whilst a structured product might attract costs of 3% - 5% once all manufacturing costs are taken into account. It is not to say that these instruments are unsuitable, but it is about deploying them in the right place. For example, investing in an active fund in a market where it is hard to beat the index (e.g. US larger companies) may not make sense, where a low cost index tracker will achieve a similar result. Think about what makes sense for any particular context and challenge the investment strategy of your advisor

·       Spreads on loans and foreign exchange can also be significant and are sometimes hidden. It is worth establishing upfront what these will be. Whilst not everyone makes use of a lending facility, virtually all will need to transact foreign currency, and this is therefore particularly important

·       All-inclusive fees are sometimes offered and offer useful certainty. However, don’t accept them at face value – actively compare what your likely transaction pattern will be, and what a transaction-by-transaction approach will cost

·       Stamp duty is not a fee, it is a tax. It is levied on certain transactions, in certain jurisdictions (e.g. up to 0.15% on equity transactions in Switzerland). When comparing different booking locations for your assets, you must take tax into account, as again it can be a performance drag

In all of this, you should of course negotiate. For clients with USD10m or more of investable assets, discounts are often achievable. Not surprisingly, your strongest negotiating position will be when you have several banks competing for your business. Also, if your relationship manager is newer to an institution, they may be more willing to discount, as they build their client base. Small or mid-tier firms may be keen to grow market share, and again may be more flexible. Bear all of this, in mind.

Conclusion

Be critical, negotiate hard. Especially in a low return environment, don’t pay too much. Contain fees to the right proportion of your total returns. And ensure that you are rigorous in the questioning of your advisors. Remember, achieving the right level of fees is critical to any successful investment strategy. After all, fees come directly from your returns. We can support you in your fee negotiations, ensuring that you are treated fairly by banks and wealth management firms.

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