Wealth management under fire

The wealth management companies and private banks of the future could look very different from the businesses of today, if calls for change are answered.

This year has seen the publication of numerous reports on the industry – most of which have identified a lack of trust between clients and these financial institutions – leading experts to predict that simple fee structures, regular reporting and transparency will have to be introduced within the next five years.

“Wealthy people have, for quite some time, been underwhelmed by the products and services that have been on offer from their banks or financial institutions,” says David Giampaolo, chief executive of Pi Capital, an investor network group for wealthy individuals. “When everything in the financial world was going well, most people didn’t question whether they earned 10 per cent rather than 14 per cent – they were just happy to make money.

“Then the financial downturn shone a light on fees, products and performance and people were shocked at how much they were being charged and started to question exactly what they were getting for their money.”

But while some private banks and wealth managers have been battening down the hatches and tinkering with their in-house products because of the financial crisis, others have been listening to calls from their clients for change – and have started adapting their business models.

Fee structures for client portfolios managed by these companies can range from 0.5 per cent to 1.5 per cent, depending on the value of the holdings. But these charges can be difficult to understand as some institutions allow negotiation over fees and others are slow to disclose their charging structures. “Although we don’t expect to see anything change straight away, we think there will be a move over towards a more simplified fee structure in the next few years,” says Giampaolo. “We could see the introduction of a flat-rate charge.”

However, he says it could be hard for existing companies to re-engineer their cost base so he predicts that this area could become dominated by start-up wealth management companies or businesses that have been spun out of existing organisations.

Others suggest there could be a move into performance-related fees. “Some investors want a fixed fee of 1 to 1.5 per cent but others believe if returns are not good, then this fee is not merited,” says William Drake, co-founder of Lord North Street, a private investment office. “However, performance fees are not as simple as they sound and can lead to incentives to take more risk. Specific times over which this should be calculated would be set and then stuck to.”

He believes that, once transparency is achieved and a consistent track record is built up, then good managers will be able to charge more.

Some say that fees are not the issue – it is more about the way the products are sold. “It’s not a problem for advisers that just sell products,” says Drake. “But when advisers present themselves as independent wealth managers but are selling in-house products, that’s where the problem lies.”

Rob Taylor, chief executive at Kleinwort Benson Private Bank, says the way to rebuild trust is to improve the professional standards overall and harmonise working practices. “At the moment, we are simply a representation of wealth, a hodge podge of different parts of the financial services business, but we have not said exactly what we believe a private banker should have achieved to make them a private banker,” he says.

Taylor believes that for clients to regain confidence in the industry, there needs to be a code of conduct for all private banks and wealth management companies. “For us to regain trust, we need to offer a standardised service with qualifications attached to the job of a private banker.”