DO THE SUMS ADD UP? A LOOK AT CHARGING STRATEGIES IN THE ROUND

Wealth Management & Private Banking

15 November 2018

Advisory investment servicesUHNWIWealth Management & Private BankingWealth Management and Private Banking

Advisory investment services are becoming increasingly costly for banks to offer, prompting many to move assets away from this service and into discretionary mandates or pulling out of this offering altogether. Delegates discussed their experiences with the advisory proposition in terms of regulatory implications and also their clients’ perspectives.

Headlines

  • Profit margins on advisory services are much lower than on discretionary portfolios since complexities such as suitability assessments are introduced into the offering
  • However, advisory can be immensely more profitable when offered to UHNW clients
  • Clients do not necessarily see the costs involved in running an advisory account, and therefore expect the bank to lower fees while maintaining service levels
  • For clients to see the value of the relationship, advisors now need to provide more than just ad hoc investment advice

Key themes

Wealth managers around the table agreed that discretionary mandates have a higher profit margin than advisory, resulting in many firms slowly moving assets away from advisory accounts or pulling out of offering the service altogether.

The costs to run an advisory service are high and these are not always able to be reduced to match clients’ expectations while maintaining the same service. There is an element of value to describe to clients and the regulator, and it could be more expensive, but clients will get more out of it.

All agree that advisory charges should be higher than those of discretionary services due to increased complexities such completing suitability assessments. The problem is how to make it scalable such that the profit margin can be increased successfully.

The UHNW space can offer large margins where service demands are more complex. However, one delegate observes that pricing in the US is increasingly becoming a flat fee for certain components so clients with assets of USD25 million and USD50 million are paying the same percentage. They anticipate this to coming to Europe.

One delegate felt there should be a tactical tilt towards using passive instruments. However another raised concerns over competing with D2C platforms’ low fees. Clients also prefer to use advisory services for private equity and other products that they cannot access in discretionary mandates. Especially in a post-MiFID environment, delivering an advisory service can be intense and some firms will only offer it under special circumstances for complex clients.

Another delegate asserted that active versus passive is not black and white – it is hard to justify the core of the portfolio being active when clients are typically using three to four wealth managers at a time, rendering their investments passive anyway due to the number of funds they invest in.

When asked how they present fees to new clients, one delegate said their firm presents both fees and commissions as a single number before onboarding but also putting in clear assumptions as to how the portfolio will be run.

The discussion then moved on to technology and to discussing the opportunities for digital implementation to reduce costs. One firm mentioned that as people costs and regulatory costs increase, there will be a squeeze and the market will determine fees. Scale is also required for technology to pay off.

Clients are highly focussed on costs, even those with USD50 million to invest find it hard to find a solution – one delegate recounts an anecdote where a client with precisely that much to invest would not pay more than 1% to any wealth manager out of principle, resulting in a search involving 25 managers. However, the difference between affluent and UHNW is also that after a beauty parade, the UHNW is more likely to place money with all three firms they assessed.

As almost all banks are pulling away from advisory and becoming “discretionary with a nod”, the moderator asked where advice begins and ends in terms of ongoing monitoring and obligations to the client, especially around performance. One delegate felt that it is much easier to move a client to an advisory mandate than provide one-off advice for a discretionary client.

In the second session, the conversation included a discussion on the difference between transparency and clarity – firms can cite a number but not the rest, which is not a helpful disclosure. However, one delegate observed that fees and charges are now very similar across the majority of banks and it is not enough for clients to differentiate.

Delegates also agreed that there has never been much guidance from the regulatory body and therefore standards are always set by the first firms who get into trouble.

For the clients who want venture capital or private equity products, the risk is that once price tables are mocked up and the total cost comes up to EUR150,000, the clients may not want to pay anymore although the bank may only earn EUR50,000 while the other EUR100,000 goes to third parties.

For clients to see the value, one delegate focussed on the nature of the relationship:

“If it is just a few chats and not bringing value add such as sorting out their life and wills etc, the client may not be willing to pay fees. On the other hand, if the advisor gives more than just investment advice, clients are more than willing to pay fees for all advice even if the investment performance is in line with the market.”

Conclusions

Most assets held with the firms present at the roundtable are already in discretionary portfolios, but banks who want to keep offering advisory services need to find a way to make it profitable in the post-MiFID II world.

Expert: Jessica Reed, Farrer & Co

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