Hopefully your wealth management contracts and agreements are not the places where you skip the fine print, because if so, you could be getting hosed. Between initial charges, annual charges, transaction charges and performance charges, if you don’t pay close attention, your wealth management firm could be making close to the same amount of money from your portfolio as you are.
Even if you do read the fine print, banks are still making more than they disclose when selling third party funds, as the charges are not passed onto the client at cost. When a financial institution sells a product to a wealth management firm, the product comes with a certain charge, usually somewhere around 2 percent, which is split between the two. However, the wealth management firm will then agree with the seller to charge, for example, 3 percent and pocket the extra percentage. Essentially funds and products from third party providers are sometimes marked up twice from wholesale price.
Make sure they’re working for you
This creates an added incentive for wealth managers to sell specific products that bring in more revenue to the bank. Banks sell products and bankers essentially work on commission; they therefore inherently have split allegiances.
“Many wealth mangers focus on sales and marketing. They have a range of products and they spend their time convincing prospects and clients to buy them,” said Dory Hage, head of advisory and asset allocation at Banque Libano Francaise. “One of the most common mistakes that wealth mangers make is to sell a product that they don’t understand, driven by financial incentives.”
Also worth noting is that the volatility of today’s markets makes trades more frequent, meaning more transaction fees. Competition with online trading platforms has been pushing down bank fees, but transaction charges should still be monitored. Keeping an eye on this figure is a necessary chore for any client with a discretionarily traded part of their portfolio. That said, trading should not be avoided for the sake of cutting costs.
And if you thought fees were bad, there is another threat to your earnings that is not contained in the fine print. This threat is institutional self-interest, and if you don’t watch closely, you can end up with a portfolio that suits your manager better than it suits you.
“In this universe there are thousands upon thousands of investments and the reality is that most bankers are more willing to push in-house funds, which are definitely not the best. The reason being that providing in-house funds, which the banking officer feels might do the trick, generates more fees for the bank rather than sending [funds] to a third party money manager,” said Nadim Haidar, senior private banker at FFA Private Bank. He continued: “All banks preach open architecture, but they rarely practice it because the bottom line is what counts. As a banker, you have to generate fees for the banks as a multiple to your salary.”