Wealth management: the illusion of “all in” fees

So-called “all-in” pricing formulas have been widely used in Swiss asset management since the mid-2010s. With an apparently attractive proposal: the client pays a one-time commission, on average in the order of assets, for the management of his capital. Simplicity, transparency and limited costs are the arguments put forward. In reality, other costs, usually hidden, are added to this package, often increasing wealth management costs by more than 50%.

“The “all-in” does not exist! A customer who signs such a formula expects to pay 0.8% for its management, but in most cases returns to him between 1% and 1.3% per year. At least,” say Lital Puller and Bruno Gillet of CAPanalysis, a Geneva-based firm that scrutinizes wealth management practices. The difference between 0.8% and 1.3%? Hidden costs: “The banks take a margin on the stock exchanges, on their house funds and the structured products they place in the portfolios. These extra costs are invisible because they are included in the exchange rate or the price of the products billed to the customer,” describe the two specialists who use internal software to identify these extra costs.

Average 1.4% per year

A management mandate of half a million francs in assets and highly stock-oriented cost the Swiss market an average of 7,000 francs, or nearly 1.4% per year, according to a 2019 Moneyland study that did not involve traditional private banks. For 1 million francs, customers paid an average of 1.37%. Such mandate does not include taxes, exchange fees or those charged by the funds placed in a portfolio.

In their practice, Lital Puller and Bruno Gillet have found that switching to flat rates can have a significant impact on the management performed for a client. One of the first cases they handled as lawyers involved a client with 2 million francs in assets, who paid about 38,000 francs in fees a year. It has moved to an “all in” model in an effort to cut that cost. “From there, his portfolio saw increased turnover and contained more money from the bank in question. As a result, this client again ended up with more than 30,000 francs in costs per year”. Internal funds generally underperform, according to a survey published in September 2020 by financial advisor VZ VemögensZentrum.

Also read: The Swiss savings at the banks are misplaced

The ‘all-in’ formulas were a way of responding to the end of banking secrecy in the 2010s, which left Swiss banks more exposed to competition from branches in the customer’s country of residence, which often offer cheaper services. This type of pricing has been enabled through the use of technology and it simplifies cost management on the part of the banks, compared to a situation where each customer would benefit from a tiered price.

Advantage for large banks

It also provides a powerful competitive advantage for the major banks, who can offer attractive flat rates as they make up for it thanks to in-house products, especially structured products, which they place in their clients’ portfolios. A strategy that smaller banks that do not produce their own products cannot implement. The customer, for its part, risks a deterioration in the quality of its management, continue Lital Puller and Bruno Gillet of CAPanalysis: “Since banks have every interest in industrializing as much as possible, management offered to customers in “all in” , they are reluctant to pay specialists to manage these clients.”

The situation can be complicated when the money is only deposited in a bank and managed by an independent trustee. In another file followed by CAP analysis, which is currently pending in court, the external manager had negotiated an “all-in” with the bank for his client. “Except that this package was very high. As a result, this client, whose assets were over 20 million francs, earned 60,000 francs over two years, while his independent manager, who paid 50% of the commissions charged by the custodian bank, earned nearly 1 million francs. earned. And the bank probably 150,000 francs,” Lital Puller and Bruno Gillet further describe.

Also read: Tensions between managers and custodian banks

No concessions to profitability

Contrary to popular belief, banks aren’t agreeing to sacrifice portfolio profitability when they offer “all-in” rates, continues Trevor Pavitt, co-founder of Lyra Wealth, a financial consulting firm that is very vigilant about management costs. “Let’s take the example of a theoretical portfolio of 1 million, with a fixed formula of 1%. If it is 50% foreign currency, it generates 0.5% more. If it is invested in ten funds, which charge a 1% management fee per year, we arrive at 2.5% in this model, which is very common. With a return on portfolios of 1%, the banks are very satisfied; at 2 or 3% it’s party time!” The year 2021 was a historic year in Swiss asset management, with many establishments such as Pictet True Julius Baer record record profits.

Also read: 2021, a great year for asset management

To limit costs, a customer has to negotiate with his banker, our interlocutors continue. Specifically, to get a low rate for the “all-in”, to put a limit on the proportion of house funds a portfolio can hold (for example, 20%) or to take advantage of wholesale foreign exchange rates.

At stake is whether the customer stays with the bank or changes. “It is much more expensive for a bank to acquire a new customer than it is to maintain an existing relationship,” said Trevor Pavitt. However, the customer does not judge the quality of the management he receives based on the financial performance of his account; more important is the feeling that his manager has taken good care of him. “All-in” prices have a reassuring side in this regard.”

Also read: Democratization and high prices, the dangerous cocktail of private equity

a lot of marketing

But if a customer tends to leave? “One of the classic levers is to reimburse part of the cost to him, like a car salesman offers an accessory or an option to take away a sale,” replies the manager, with more than thirty years of experience in the field of counter. In asset management, clients are notoriously reluctant to switch banks. The 2019 Moneyland survey found that only 12% of surveyed customers plan to do so in the coming years.

“All of banks’ energy and intelligence is being used exclusively for two missions,” concludes Trevor Pravitt: to find creative ways to maximize the costs charged to customers and fulfill this desire through effective marketing. This explains why marketing is generally one of the top three costs in asset management, along with fees and IT.

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