The way private banks are looking at charging for their services is evolving, as many US firms consider moving away from traditional, transa...

The way private banks are looking at charging for their services is evolving, as many US firms consider moving away from traditional, transaction and asset-based fee structures. Many firms that cater for the ultra-high net-worth market are mulling over how to charge for advisory pricing. "In the past, firms charged for their advisory services using a flat fee — for example, $10,000 for advice. But when the asset management industry grew, firms started providing the advice for free. They gave advice to prospective clients as a 'teaser' and then based their fees on the individual's assets. I think that as the asset management business has declined and clients are tired of looking at products there will be a resurgence of pilot programmes, whereby firms charge for advisory services based on how much time they spend with a client," a private banking consultant in New York told Private Client Management "Companies will charge people based on time — and this will be either a minimum fee or a retainer. But I suspect that these will only be available at the ultra-high net-worth end of the market, because it's not really a scalable model. At the lower end of the wealth management market, there will be forays into this type of pricing but it will be more like past models with traditional financial planning and a flat fee of between $2,000 and $3,000. I also don't think it will be called a financial planning fee — they'll call it a wealth advisory fee or something like that. "Many industry groups have also been interested in fees and pricing, as firms are pressed for revenue and want to break even. So there are lots of schools of thought on this from the advisory side. Clients are also pushing for new pricing models and firms are being responsive to this and looking for ways to distinguish themselves in the marketplace. However, the number of firms and people who are qualified to provide wealth management advice is more limited today than the number of people who give straight product advice, which is also slowing down the adoption of this model," she noted. The consultant added that while many firms are looking to change their pricing models, they are not sure how to implement these because it is not a product that they can assess easily from a profitability standpoint. In addition, clients cannot necessarily immediately assess such models in terms of any value added to their service. Clients are also baffled because there are so many products; they need more advice about the products as they become more complicated. Rob Rowan, the founder of Family Office Exchange, has mentioned that the US wealth market is not alone in turning to alternative pricing methods and that many German firms offer alternative models similar to those discussed above. "In the time before multi-family offices came along, private banks performed a lot of those services and charged very little for them. Instead, they depended on the revenue they got from the investment management fees. So multi-family offices have now come into the marketplace and are charging for things that the banks had given away for a long time. Banks are now recognising that they can charge for advice because the multi-family offices are doing so," Rowan told Private Client Management. The main reason wealth management firms are adopting new pricing models is that they are trying to gain the trusted adviser relationship, where they provide a consultative service for the families they manage. Consultants charge by the hour, so part of getting a client to view a firm in a consultative role is to restructure parts of the business that provide advice in this way. This also means that firms do not have to depend on the revenues from straight asset management, Rowan noted. Is talk of new pricing models just hot air? The recent evolution in pricing is not underway at JP Morgan Private Bank, however. In addition, the firm has said it has not viewed a shift in how private banks advise their clients. "I don't think there are many private banks that are charging for their advice on an hourly basis. There are boutiques that do charge for their advice — such as wealth management concerns, divisions of accounting firms or separate entities — where the only service they offer is advice. But these firms generally outsource investment products to third parties," John Duffy, the managing director of the north-east regional client practice at JP Morgan Private Bank, told Private Client Management. Duffy added that he had not seen a substantial shift in pricing mechanisms in how clients are advised and how their money is invested. He admitted, however, that at boutique wealth management firms the notion of the separation of advice and execution remains.