Take three: tips for advisors and clients when selecting a wealth manager

Thursday, 05 November 2015
Charlotte Thorne offers three tips for advisors and clients when selecting a wealth manager.


Recently, a new client of mine was surprised to discover that his investment portfolio (as advised upon by a private bank at that time) included investments in Apple. You might consider this unsurprising and even quite sensible, given the company’s stellar performance in recent years. However, the stock was held twice, through both a value fund and a growth fund. My client was paying fees to both funds, as well as a handling fee to the private bank. Effectively, he paid four times to invest in one stock, wiping out most of the value of this investment.

While it may be easy to understand how this could happen, should it happen? Who was looking after the family’s best interests in this scenario? And where else in the portfolio was this happening?

In my experience, many wealthy families and endowments have a relationship with their wealth manager that extends back over several years and, often, several generations of the same family. Financial institutions have enormous influence over the future wealth of the family. However, private banking, for example, is facing significant economic, regulatory and technological change. As major international banks have made large-scale commitments to developing their wealth-management offering, making the field more competitive, new models of private banking are emerging.

So, how can wealthy families ensure their best interests remain front and centre? The following three key questions will help you work out how well your client’s financial institution works for them.

When and how do financial institutions make money?

Fees crop up in many different service lines, including custody and administration. They can be structured in several ways that make it difficult to fully understand how a financial institution makes money from a client, and to then compare the costs with those of other providers. Frequently, the figure quoted to new and existing clients is a headline fee and excludes many other charges that can make a significant difference to the total fees payable. How can clients identify the true cost?

Your client should ask for the all-in fee (fees on the whole portfolio and on every transaction but also fees for reporting and for access to online services) and then go through it carefully line by line to make sure they fully understand every element. In one particularly surprising case, our client had not realised that their financial institution (in addition to all other fees) paid itself a commission every time a dividend was paid to the client from their own portfolio. In another, the client thought they were paying 0.5 per cent, but actually it was closer to 3 per cent.

While there may be a simple rationale for complex fee structures, it is the responsibility of wealth owners and advisors to understand exactly how the financial institution makes money.

Is your client the institution’s customer or counterparty?

While wealth managers may provide the very best personal service, do not presume that your client’s financial institution will always treat your client as a customer. For example, while access to a service such as 24-hour forex trading may seem appealing, how does it help your client? Should they decide to trade Japanese yen at 3am, their professional counterparty at the trading desk will be incentivised solely to make money for the financial institution. Ask yourself: who ‘wins’ in this scenario?

How do the institution’s ideas fit with your client’s portfolio?

The investment strategy of each portfolio should be specific to the individual needs of the client – their objectives (e.g. regular dividend versus capital growth) and their short-, medium- and long-term horizons. Each investment strategy is unique. At the same time, you should expect your client’s wealth manager to proactively suggest new and interesting investment opportunities for consideration. This is where they can provide clients with access to opportunities that they may not personally be able to find.

Each time your client is presented with a new, ‘hot’ option, they should ask their wealth manager: ‘How does this idea fit into my overall portfolio strategy?’ Remember that many ‘best ideas’ are often actually the most marketable or profitable for the bank. These new ideas should be challenged rigorously before allocating capital.

Decision time

Ultimately, appointing a financial institution or renewing a pre-existing relationship is complex and challenging – as it should be. Time spent on due diligence and searching questions is a small price to pay for forging a profitable and mutually supportive commercial agreement that protects and enhances wealth.

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Charlotte Thorne

Charlotte Thorne is a Partner at Capital Generation Partners.

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