As the confidentiality culture in private banking is eroding, performance and costs are stealing the industry’s limelight. But has the industry, in its dash for transparency, become too complex for clients to understand what they are paying for?

Wealth managers and private banks are not as secretive as they used to be. Historically, the main concern for high net worth individuals was to find a safe place for their assets, but as the confidentiality culture has at least partly eroded, performance, costs and services such tax planning are increasingly taking centre stage.

But has the industry, in its dash for transparency, become too complex for clients to make sense of it?

One major difference between retail banking and wealth management is that it is relatively straightforward to compare prices between different players in the former sector. Even if most wealth managers and private bankers provide factsheets with their basic fee structure on request, it is far from easy for a layperson to decode them as they are often heavy on figures and written in jargon.

“There are a number of different elements to fees: fund managers’ charges, administration fees and advisor fees…many public sources differ in what is included and it’s therefore hard to compare like with like,” says Andy Cowan, national sales director at Towry, the UK wealth advisory firm.

“Some journalists are wondering why there is no ‘compare the market.com’, but it is simply because we are in the business of bespoke solutions, and it is too complicated to compare,” says Peter Collier, spokesperson for UK private bank Brown Shipley.

Whose side are asset managers on?

David Norman, chief executive of TCF Investment, an asset management firm, is critical of pricing in the industry. “Assets management is a great industry to be in,” he says. “Imagine you’ve got £100 million (about $160 million) of assets, the markets grow by 10 per cent and you add 1 per cent of Alpha. If you charge 1.5 per cent, that’s £1.6 million. That’s not bad, because all you’ve done is to add £1 million of value, because the market and the capital did the rest," he said.

“And when it goes down, when you’ve taken away last year’s fee and it goes down by 10 per cent, you still take a fee of £1.4 million,” Norman says. “If those two years happened in a row, the customer has lost £4.6 million in total, and the manager has gained £3 million. Not many industries could get away with that.”

Norman, with help of research carried out by Compeer, the UK research house, argues that asset management is a rapidly growing business where revenues are lagging behind because of increasing costs.

According to ComPeer’s latest Wealth Management Report, total revenue for private banks and wealth managers in the UK last year rose by 7.7 per cent compared with the previous year, while total costs went up by 8.3 per cent. However, in the past five years, costs have grown by about 42 per cent, from £2.5 billion to £3.5 billion, whereas revenues have increased by 50 per cent, from £3 billion to £4.5 billion. However, in the time-frame, total investment assets for UK wealth mangers and execution only stockbrokers have risen by about 77 per cent, from £268.7 billion to £475.1 billion.

What are the highest costs in asset management? Staff. When a company adds clients it is probably looking to add relationship managers, but most wealth managers tend to have fairly low staff turnover. The reason is that the total number of funds in the UK has stayed largely the same over the past ten years. (However, it is fair to say that turnover in other regions, such as Asia-Pacific, has been significant.)

“If a fund that was £100 million is now £200 million, how many more people do you need to run it?” Norman says. “As the industry gets bigger and bigger, it should get cheaper, but it doesn’t,” he says, referring to that average total expense ratio for UK retail funds have gone up from 1.5 per cent to 1.7 per cent in the past 10 years.

“If I have got $10 million, I’m not going to pay you $170,000 a year for my investment advice, you must be joking!” Norman says. “How much did the market deliver last year? 4 per cent. And you want me to give you half of that in fees?” As he bluntly stated, this is unlikely.

Why do prices keep rising?

What allows fund managers to charge what Norman sees as too much is greed and lack of transparency – at least the right kind of transparency. This goes back to Cowan’s comment: wealth managers differ in what they choose to publish. Norman argues that factsheets should include total running costs of the funds; his own firm has a ceiling of 0.8 per cent.

“This level of service is not price-sensitive; you cannot buy wealth management on the cheap,” says Collier from Brown Shipley. “These are people placing their family’s future in our hands.”

“I see ourselves as a luxury goods brand,” says Lee Clark, financial planner at UK private bank Arbuthnot Latham & Co. “In the recession, the luxury goods brand is still faring well, it is the mass market that is feeling price-pressure. Wealthy people are not driven by price-comparison websites, they are driven by service.”

Graeme Clark, head of private clients at Courtiers, the UK asset manager and wealth planner, agrees: “It’s not about trying to be the cheapest in the market; the client pays for a red carpet quality service,” he says. “And as long as they are getting that, that is the priority really. In this day and age, you can’t provide any good level of service at 1 per cent.”

How to get cheaper wealth management

Norman is not the only one who thinks that the level of costs in the industry is too high. “The list prices are still ridiculously high,” Steffen Binder, co-founder and managing director at MyPrivateBanking, a European organisation that pushes for improved client service in the sector.

“If you add everything up: base fee, trading fee plus hidden fees in the products they are offering, we are talking 200 to 300 basis points in many cases,” Binder says.

Binder suggests that there is always room for negotiation when a client is being offered a price. “From our experience, you can probably push any private bank today to lower their fees, to somewhere between 30 to 70 per cent, from their list price,” he says.

“Talking about 70 per cent, it would be a client who would bring something like £5 million or more, and that would also be someone who would want to play an active role; it would be more like an advisory mandate and not a discretionary mandate, which is often more expensive,” he says.

Many wealth managers have fund structures which give better deals to clients introducing more capital, but Binder means that clients can get an ever better deal beyond that. He also stresses that the clients should shop around and push for cheaper products, which sounds very far away from anything most people would associate with the industry.

“Private banking is not necessarily a very privileged service with oil paintings and meetings in expensive restaurants in Geneva; some clients now see it more as a standardized service – somewhat like a mobile phone service,” he says.

The change, according to Binder, is not coming from Europe, where high net worth individuals tend to be older, but from Asia. “Asian wealth management clients are different from Europeans; they are usually much younger and more entrepreneurial, so they are pushing their bankers,” he says.

Binder thinks that the change will spread to Europe: “If you were a successful businessman in Asia, say, 15 years ago, you would bring your money most likely to Europe or maybe to the US. But you would not choose to go to Hong Kong or Singapore. Today, they are competing with jurisdictions such as Zurich, Geneva, London and New York.”