Buying a house is the most important financial decision you will ever make, so the adage goes.
But if you are wealthy enough to be considering appointing a private banker to look after your wealth, you are probably an exception to that rule.
Indeed, with many private banks insisting their clients have investable assets of at least $1m or more, for the growing numbers of people who are turning to wealth managers to look after their affairs the decision as to which institution they appoint to look after their money is likely to be the most important financial decision of their lives.
This explains why the decision is so daunting. The choice is made even more bewildering by the increasing numbers of institutions clambering to manage the cash of wealthy investors. Commercial banks, financial advisers, lawyers, accountants and private banks are all beefing up their expertise in the wealth management arena.
Which outfit you choose will in part be determined by how much you are worth.
Some high-end private banks or exclusive family offices will not even open their doors to you unless you have at least £10m ($19.8m) to invest. At the other end of the spectrum, some firms of financial advisers or stockbrokers may offer some kind of wealth management service on portfolios of just £100,000.
But, while the options available are likely to be limited by how rich you are, there are many other more important considerations.
Some financial advisers and even some private banks will be – at least in part – remunerated by commissions received from investment products they sell. The risk with such an approach is that the interests of the client may not be aligned with those of the adviser. In extreme cases, commission-bias can cause advisers to recommend a product that pays a high commission rather than the best investment opportunity.
So potential clients are advised to probe their wealth manager over how they are paid. “If I were a client, I would want to know how they are remunerated,” says Matthew Brumsen, head of wealth management for the UK and north and eastern Europe at UBS. “Is the compensation structure linked to things that matter to me [as a potential client] rather than things that matter to the bank?”
For Nick Fletcher, chief executive of Saunderson House, a London-based firm of financial advisers whose typical clients are lawyers and accountants with investable assets of about £3m, the keys are the quality of advice and the independence of that advice.
Saunderson House is representative of a growing number of firms of financial advisers that are snapping at the heels of the established private banks by targeting wealthy clients with a commission-free model, embracing fees instead.
At the top end, hourly rates tend to mirror those of high-flying lawyers, so that a fee-based approach becomes financially worthwhile only for sizeable portfolios.
True independence extends not just to fee and commission structures but also to how easily a private bank can embrace investment expertise from outside the bank. Some wealth managers such as Coutts, the UK bank, targeted a “multi-manager” or “open architecture” approach fairly early on in the belief that experts in any one field are rarely home-grown.
Indeed “open architecture”, whereby wealth managers are able to shop around the globe for the best expertise, is one of the big buzzwords in private banking. Some, such as Pictet & Cie, the Swiss bank, insist that their wealth managers offer only the funds of external fund managers. Others such as Citigroup may offer in-house funds but will leave the decision as to whether Citigroup funds are held in a portfolio entirely at the discretion of the client.
“You may sit with a client who does not want a single product of the bank’s. It’s about objectivity and it’s about due diligence,” explains Peter Charrington, global market manager for the UK and Greece for Citigroup.
He also insists there are varying levels of open architecture, with some wealth managers just offering a tiny handful of external fund options in any one asset class or investment discipline.
“Clients should ask: just how much access does [their wealth manager] have?” says Charrington. “This is not just about recommending X, Y or Z for an asset class but also why they are better than A, B or C. It’s very important that you differentiate between the crème de la crème and the also-rans.”
This is where the big wealth managers insist scale is important. With more wealthy investors scrambling to gain exposure to hedge funds or private equity in their portfolios, bigger wealth managers insist their size opens doors closed to smaller rivals.
Certainly, if you are considering holding hedge funds in your portfolio, it makes sense to quiz your prospective wealth manager over the types and range of hedge funds to which it has access.
Also check the services on offer. A decent wealth manager will be able to offer the full suite of trust and estate planning services, either internally or through specially selected outside law firms. Some top banks will offer a wide range of additional services, from philanthropy to helping you build an art collection and securing a loan on your yacht.
As a prospective client, you will need to decide the level of advice you require. Generally wealth managers offer either full-blown discretionary management, whereby your wealth manager makes investment decisions on your behalf, or advisory, where you are consulted on each investment decision. Which route you opt for may partly be down to the time you have and also where you are looking to invest. Some wealth managers may offer discretionary services on a stocks and shares portfolio but insist you go down the advisory route on potentially riskier areas such as hedge funds or private equity.
You should also find out how your money will be managed. Is there a house style, or are wealth managers given significant freedom in stock picks or asset allocation decisions? Most established private banks insist their individual wealth managers do not stray far from a house view. But in some cases, traditionally among some more old-fashioned firms of stockbrokers, performance can vary depending on which individual is managing your money.
To ensure you are not getting a raw deal, you should be regularly updated on the performance of your portfolio, say every three or six months, against agreed benchmarks. You should also ascertain early on in the procedure what risk measures are used to gauge this performance.
Most wealth managers will not inundate you with performance and risk measures. But if you are a fan of Sharpe ratios and information ratios, feel free to ask your adviser for these. If they are worth their salt, they should be willing to oblige.
Wealth managers recommend that potential clients conduct beauty parades with several short-listed banks or advisers. Most will send wealth managers to a place to suit you but you may like to take the time to visit the institution in question to gain a better feel of the culture of the organisation.
Above all, private bankers say, the personal relationship is crucial. They need to understand your needs and that means both your financial and personal objectives. And even after you have selected a wealth manager it can make sense to take your time building up your portfolio. “We recommend clients put their money on deposit for a while and take their time before investing,” says Charrington of Citigroup. “It’s very important that as a client you are dealing with a bank you can trust, and with which you are comfortable.”