Cut The Costs of Wealth Management

Independent Advice to Get More out of Your Wealth Manager
Cut the Costs of Wealth Management

by Christian Nolterieke, Managing Director
1. Summary
The total cost of wealth management is the single biggest lever you as a client can
influence to radically boost the performance of your portfolio. If you can cut the cost by
only one percentage point a year, a USD 1 million investment will easily return an
additional USD 450k after 20 years.
There are a lot of ways to cut costs without hurting your performance. However, because
of lack of knowledge or inattention, you probably will not fully explore them all. The
main reasons are:
 Cost Drivers and Pricing Models are many, and not transparent.
 You are often not aware of various indirect costs, easily doubling the direct costs of
managing a portfolio.
 Indirect costs are hidden in many products and transactions, and in most cases you
are not informed about them by your wealth manager. This is because he/ she can
make a lot of extra profit on your portfolio through kickbacks and in-house products.
You should not pay more than 1% per year of your total assets for wealth management.
You can take control over your costs by rather simple measures:
 Choose a strategy and wealth manager best for your investment type and amount.
 Push you wealth manager for full transparency, the use of cost-effective products,
and full disclosure and payback of all kickbacks and commissions.
 Opt out of all services provided by your wealth manager that you do not require, or
you can get somewhere else at a cheaper rate.
Finally, and most important: Negotiate! There is plenty of room for fee reductions.
Educate yourself about the market and communicate precise and determined
requirements; and within minutes you can save a lot of money.
Please use this guide as a basis to calculate your own costs of wealth management and to
determine your levers to cut costs. Due to its wide variance, the research estimates of
direct and indirect costs can only be average numbers and ranges. Please ask your wealth
manager for the specific details about your portfolio.
www.MyPrivateBanking.com
The Wealth Guide Series Page 1
2. Small Numbers Have A Big Impact On Your Wealth

The costs that wealth managers show their existing or potential clients have always one thing
in common: They look small. “All-In-Fees” usually range between 0.8% to 1.6% per year, and
clients who want to be charged by transaction have to pay fees mostly as part of a thousand
per transaction. These are small numbers that seem to be insignificant. But in fact they have a
huge impact on your wealth and consequently, your life: Why is this so?
Costs Add Up Enormously Over Time

The success of wealth management can only be determined in the long run. Apparently
small fees can add up immensely over time, and via compounded interests will reduce your
returns significantly. The absolute costs grow pro-rata with the increase of the assets. The
following table shows how a “Total Cost of Wealth Management“ Rate of 3% p.a. will
generate compound costs of about USD 450k after 10 years (Based on an initial investment of
USD 1 million with an average return of 7% p.a.):
Figure 1: Costs can add-up enormously over time
Example: Investment amount 1 million USD, 7% performance p.a., 3 % Costs p.a.
Year 1 Year 3 Year 5 Year 7 Year 9 Year 10

USD (in 1`000)
600 524k
454k
400 328k
Profit 218k
200 122k
38k
0
103k
-32k 185k .
278k
-200 -103k 384k
444k
-185k
Costs
-278k
-400 Compound Profit after Costs
-384k
Compound Costs -444k
-600
Compound Profis vs. Compound Costs (in USD 1`000)
A yearly growth of your assets by 7% will not only grow the total assets significantly, but
also the yearly cost of wealth management. 3% p.a. will eat up almost half of the gross profit.
How annual costs can go up to 3% per year even if clients think they pay only 1% for an
“All-in-fee” will be analyzed in Chapter 3.
Costs Take A Lot Of Your Performance Away

While costs figures of 2% to 3% look rather small in absolute terms, they are very high in
relation to the average yearly performance of 3% to 7% you are most likely to achieve. (For
details on the average performance of various asset classes, please check our Guide Making
the Right Asset Allocation on www.myprivatebanking.com).
The following table shows how much you lose depending on your total costs p.a.:
Investment amount: 1 million USD
Performance p.a.: 7%
Lost Profit after Total Costs of Wealth Management
Total Profit Costs p.a.: Costs p.a.: Costs p.a.: Costs p.a.:
before Costs 1% 2% 3% 4%
10 years 967k -148k -296k -444k -591k
15 years 1.759k -269k -538k -807k -1.076k
20 years 2.870k -439k -877k -1.316k -1.755k
Table 1: Lost Profit with different Total Costs of Wealth Management
After 20 years, a very common figure of 3 percentage points for the total costs will reduce a
gross profit of about USD 2.9 million by a stunning USD 1.3 million (based on an initial
investment of USD 1 million and average return of 7% p.a.).
If the investor in this example can cut his costs by only 1 percentage point per year, he will
gain up to USD 450k after 20 years – and unlike the returns promised by the wealth
manager, this gain is for sure and can be influenced by the client.
Never forget inflation

It seems obvious, but often wealth managers as well as clients “forget” to take inflation into
account. When assessing the performance and determining the investment strategy to
achieve a specific income per year, you should always work with the real performance
(Gross profit minus “Total Costs of Wealth Management” minus inflation). Inflation usually
ranges from 2% in mature economies and up to 10% or more in emerging markets. In the
1970s and 80s, inflation had reached double digits even in developed countries. You should
always calculate the performance targets by not only taking the total costs of wealth
management in account, but also the average inflation you have to expect for the main
currency of your portfolio.
3. Costs you can see – and costs not shown to you

In many cases, wealth managers have internal performance targets per managed client
portfolio, of 2% - 4% p.a. Since the communicated costs to the client are normally
significantly lower, it is important to understand the other costs you are paying and how the
various cost drivers play together.
Cost Drivers in Wealth Management

Clients have to pay for four major cost drivers in wealth management, directly or indirectly:
 Management: A wealth manager charges his clients for the pure management of
his portfolio, not including cost for third parties. A management fee is charged per
year, calculated as a certain percentage of the total assets under management. The
majority of wealth managers will charge between 0.8% to 1.2% per year.
 Banking: Depending on the extent that banking services are used for managing a
client portfolio, various costs will occur. Banks usually charge a custodian-fee,
based on the total asset volume placed at the bank. However, the main cost driver
is the number of transactions, such as buying and selling stocks, bonds, funds, etc.
These costs also include fees that will be charged by the bank, but actually go to the
government, such as stamp tax. However, banks sometimes introduce fees that
sound official, but nonetheless are pocketed by the banks themselves, such as
“Ticket Fees”.
 Products: For all investments in managed products e.g., mutual funds, hedge funds
and structured products, the client has to pay for one-time or on-going costs. He is
charged mainly through front-loads (issue surcharges), management-fees and wide
spreads between buying and selling price. The number of managed products in the
portfolio and the amount of direct and hidden costs for each product drives the
total costs of products.
 Performance: When the client’s portfolio performs well, his total assets will grow.
If the client has opted for a performance fee to pay his wealth manager (completely
or partly), his fee will grow through the increasing returns on his assets. Even if he
has chosen not to pay based on performance, but rather an annual management-fee
or per transaction, his absolute costs will increase. Through the growth of his
assets, the basis for calculating the management-fee as well the average transaction
size will grow.
Figure 2: Many Costs Cut your Profit
Gross Profit Product-Costs

Management-Costs • Front-Loads
• Management-Fees • Fund-Management-Fees
• „All-In Fees“ • Performance-Fees
• Performance-Fees • Commissions & Kickbacks
• Finding Fees
Banking-Costs
• Structured Products Costs
• Transaction-Fees
• Back-Loads
• Custodian-Fees
• Ticket-Fees
• Limit-/Stop-Loss Fees
• Spreads (Buy/Sell)
• Comissions & Kickbacks
Pricing models only report the direct costs

If you do not manage your portfolio yourself and instead entrust it to a wealth manager, you
will be offered one or more of the following pricing models. Each of them is based on
different drivers (number of transactions, performance, total assets under management), but
have one factor in common; they only take the direct costs into account:
 Transaction fees: The central element of this pricing model is the individual
billing of every single transaction to the client. Usually he will pay a percentage of
the transaction volume every time he buys or sells an asset. Independent of the
transaction volume is a “ticket fee”, which is often charged as a fixed sum every
time a transaction occurs. This pricing model is advantageous for clients with a
limited and foreseeable number of transactions. They should also be able to keep
a close look on their portfolio, to monitor whether unnecessary transactions are
executed.
 Performance fees. Performance-fees are based on the profit the wealth manager
generates of your portfolio, and are calculated as a percentage of the overall
performance. He will often receive kickbacks on top of the performance-fees.
Often a “high water mark” is introduced, requiring that performance fees will
only be charged after losses of preceding years are recovered. The advantage for
the client is that he only pays the wealth manager once a positive return over a
certain threshold has been reached. The problem is to distinguish between the
performance of the wealth manager and the overall development of the markets.
The main risk of a performance-fee model is that the wealth manager takes on too
risky investments and potentially violates the long term objectives of the client.
 “Flat-fee”: This pricing model offers a “flat-fee” which either covers all costs for
the management of the portfolio or for all transactions or both. Usually, “flat-fees”
are calculated as a yearly percentage of the total investment amount. Pricing
models offering a comprehensive “flat-fee”, covering the management of the
portfolio and all costs for custody and transactions, are usually labeled “all-in-
fees”. Normally not included are ticket-fees and various hidden costs, such as the
whole range of product-fees. These “all-in-fees” can vary significantly, as the
wide variance in “all-in fees” offered by twenty private banks based in
Switzerland shows. (For more details please check our study “Insufficient Client
Focus – A Survey of European Private Banks” on www.myprivatebanking.com).
Figure 3: Flat Fees show wide Variance
% of Wealth Managers offering certain flat fee (n=19)
Average
21% 21% 1.25%
Flat Fee:
16% 16%
11%
. 5% 5% 5%
0.8% 1,0% 1,2% 1,3% 1,4% 1,5% 1,9% 2,0%
All-In Fees p.a. (not negotiated)
Source: Survey of European Private Banks,

Report by MyPrivateBanking 2009
In practice, the above outlined basic pricing models are in many cases mixed. Banks
often offer the above outlined “all-in-fee” models to cover management and as well
transactions costs at a fixed rate. For independent wealth managers, it is s very
common to separately report the management fee of the wealth manager himself and
the transactions fess of the custodian. While at the first glance this mixed model looks
transparent, the client has to be aware that in many cases the wealth manager
receives kickbacks from the depository bank and as well as from the product issuers.
Hidden Costs come in many products and transactions

No matter what pricing model you choose, they have all one thing in common: You only see
the direct costs such as transactions costs, flat- or performance-fees. What you do not see, but
pay as well, are the hidden fees and costs for the various investment products in your
portfolio. These costs are called “hidden”, because most of the times neither the banks nor
the wealth managers communicate them clearly to the client.
It is not only products that have hidden costs. On the transaction level, various hidden costs
can occur too. The most obvious method to generate additional costs in a transaction-fee
model is the execution of unnecessary transactions. But even in an “all-in-fee” model
transactions can cost additional money. For instance, this may happen by calculating buying
or selling prices in a manner unfavorable to the client.
The various hidden costs can easily add up to 3% of your investment amount p.a. Clients
would be far more upset if they had to write a check for them each quarter. The wealth
manager can avoid this direct bill by calculating and showing the performance numbers after
costs. Following is a summary of the hidden costs generated by the main product groups:
 Mutual funds: When investing in a mutual fund the client has to pay an annual
management fee (deducted from the invested assets), and often also a “front-load”
fee, for buying the fund. Some funds charge an additional performance fee. A first
indication about the costs of a fund is given with the Total Expense Ratio (TER) as
published in the fund prospect. On average, the TER of a mutual fund is between
1% to 2% a year. The one-time front load surcharge can run up to 5% of the initial
investment amount.
 Hedge funds: Hedge funds have a lot of freedom in investment decisions, and also
for calculating their costs. Usually the management fee is between 1.5% to 2.5% per
year, significantly higher than for mutual funds. Additionally, hedge funds often
charge a performance fee of on average 15% to 20% on the yearly returns as long as
the performance is above the highest performance ever achieved in previous years
(“High Water Mark”). Many times the wealth managers offer their clients “Funds
of hedge funds” to diversify their risk. However, for this vehicle the client has to
pay additional management fees and performance fees to the manager of the fund
of funds. Hereby “Funds of hedge funds” can cost the client up to 5% and more per
year. This is charged on top of all other fees.
 Structured products: In recent years, structured products have been heavily

pushed by their issuers and wealth managers. Firstly, because the issuer can
usually combine a direct investment in an asset class with a derivative, and then set
the price himself. This makes it very difficult for an outsider to calculate the margin
and easy for the issuer to hide high costs. Secondly, because investors are easily
lured by the promise of achieving above average returns at a lower risk than with
direct investments. However, research shows that this is not the case overall.
Rather, simple structured products still have total costs in the range of 2%-3% per
year. These can easily go up to 4% and more annually when some extra “features”
are added to the product.
 Exchange traded funds (ETFs): ETFs and other index-based funds are mutual
funds that are not actively managed and simply reflect a certain index of an asset
class one-to-one. ETFs are very cost effective since no active fund manager has to be
paid and transactions only occur when the composition of the index changes.
Accordingly, the yearly costs are relatively low, ranging from 0.15% to 0.5% per
year.
It is not only the choice of investment products that adds hidden costs on top of the
direct fees you pay. Extra costs can also be generated through the process of portfolio
management:
 Unnecessary transactions: In a pricing model based on transaction-fees, the total

cost of wealth management obviously depends on the amount of transactions
executed within the client’s portfolio. However, not all transactions are required.
As long as you are not a trader, a high churn-rate in your portfolio is not only
generating transaction fees but in fact can hurt your performance. If your wealth
manager is not one of the rare successful stock pickers, you should invest in an
ETF rather than investing in many single stocks.
 High spreads: The price for buying or selling a stock, bond, fund, currency etc.
will always differ. The difference mainly depends on how liquid the market is,
meaning how many buyers and sellers exist for the asset at a given moment. The
difference between the price for buying and selling is called spread, and high
spreads will cause extra costs of up to 3% of the transaction volume. Wealth
managers can reduce these costs by trading in liquid markets (exchanges with a
lot of buying/ selling volume) dealing in liquid products. They can also bundle
transactions, such as combining currency exchanges from various clients. In this
way, a wealth manager can get a better rate from the bank.
Figure 4: Hidden Costs easily higher than Direct Costs

Example: 1 million USD Investment; Balanced Portfolio (Stocks 40% / Bonds 40% / Hedgefunds 10% / Cash 10%)
Pricing Model Investment (USD) Fees* Total Direct Costs (USD)

Management-Fee 1.000.000 X 0.8% p.a. = 8.000
Transaction-Fees 750.000 X 1.0% per = 7.500
Assumed: 30 Trades of ea 25.000 USD Tradevolume Trade
Total Direct Costs of Portfolio 15.500 USD
Investment Products Investment (USD) Fees p.a.* Total Hidden Costs (USD)
Funds (Stocks & Bonds) 400.000 X 2% = 8.000
Structured Products 200.000 X 2% = 4.000
Hedgefunds 100.000 X 4% = 4.000
+ ETFs 100.000 X 0,3% = 300
Single Stocks & Bonds 100.000 X 0% = 0
Cash 100.000 X 0% = 0
Total Hidden Costs of Portfolio 16.300 USD
= Total Costs of Wealth Management 31.800 USD = 3,2% p.a.
Note: * Average Fees; other hidden costs like spreads and front-loads not included
Kickbacks – the way to pay your wealth manager twice

As a client, you not only pay a substantial direct fee for your wealth management, but also
indirectly for various hidden costs of products and services. However, while product issuers
and banks charge these costs, they actually do not keep them entirely. They give back a huge
chunk to the middlemen and the investors to “encourage” them to choose their products.
These middlemen are usually wealth managers. Consequently, besides their role to advise
their clients on investment decisions, they often develop a second, often conflicting role, and
source of income: selling bank services and investment products. And for performing these
sales functions, wealth managers receive kickbacks and fees from banks and product issuers.
 Kickbacks by banks: These kickbacks are in particular relevant for independent

wealth managers who do not work for a bank. Often, they can choose the bank for
their client, and banks are willing to provide incentives to the wealth manager
through kickbacks, so that his choice is influenced. As a result, every time the
wealth manager buys/ sells stocks, funds, bonds, currencies etc. in the name of the
client, not only will the bank gain (from the transaction-fees) but also the wealth
manager. The more transactions are performed, the more money the bank makes,
and the more kickbacks go to the wealth managers. These are paid in addition to
the kickbacks from the custodian fees he usually receives in any case. Overall, these
kickbacks to the wealth manager can make up to 50% of what the client pays to the
bank. Additionally, for a first time client a wealth manager directs to a bank, he
often receives up to 1% of the investment amount as one time “Finder’s fee”.
 Kickbacks by product issuers: A multitude of financial products are competing for

investors. To make sure they find their way into the portfolio of an investor,
product issuers depend on the recommendation of wealth managers. They not only
have to persuade the client to invest in managed vehicles instead of directly
investing in stocks, ETFs, etc., but also to pick the “right” product for them. These
recommendations are worth a lot to the issuers of mutual funds, hedge funds and
structured products. Consequently, they pay kickbacks to the wealth manager for
recommending their product. Normally, 90% to 100% of the front load goes into
pockets of the wealth manager. Additionally, up to 50% of the money a client pays
the issuers through management fees, and pricing of funds and structured
products, goes back to the wealth manager. As rule of thumb, the more complex a
product is, the more money the issuers make with it - and so more kickbacks are
paid.
Figure 5: Wealth Managers receive huge Kickbacks
Product / Services Avg. Kickback in %

from Client Fees
Custodian Fees 40% - 50%
Transaction Fees 40% - 50%
Management-Fees Funds 40% - 50%
Front Load 90% - 100%
Structured Products 40% - 50%
ETFs 0%
Single Stocks 0%
Single Bonds 0%
Source: MyPrivateBanking Expert Interviews
If you are a client of a bank rather than of an independent wealth manager, you might not be
affected by these specific kickbacks. However, banks, in their mixed role as client adviser
and also product issuer, have various other levers to make extra money from your portfolio.
This happens mainly by selling “in-house products” to the client. By first issuing and
managing a mutual fund or structured product, and secondly, by recommending them to
their clients, the bank can charge the same investment sum twice: First, through fees for the
individual products, and second, as part of the “all-in-fee”. If clients are not lucky, they pay a
third time through missed gains, since most in-house funds perform worse than their
benchmark.
Kickbacks – costly, not transparent and increasingly illegal
The vast majority of wealth managers receive commissions from banks and funds for
recommending their products to the clients. Surprisingly, for a long time, neither clients and
media, nor the regulatory bodies, seemed to be offended by this obvious conflict of interest.
However, over the course of the last few years, we are seeing an increasing number of clients
demanding more transparency from their wealth managers. Laws and courts have stepped
in to end the practice of kickbacks, or at least make them transparent to the client:
For the 30 member states of the European Economic Area (EEA) the “Markets in Financial
Instruments Directive (MiFID)” provides a harmonized regulatory regime for investment
services since 2007. The main objective is an increased transparency of financial markets and
a better protection of client interests. Among other rules, wealth managers are now required
to disclose to the clients all the kickbacks that they receive from third parties. The financial
authorities of all member states had to incorporate MiFID in their rules and regulations.
In Germany, the largest member of the EEA, the Federal High Court decided already in 2006
that wealth managers have to disclose all kickbacks and also inform their clients about the
amount. Current cases take the regulation even further. Higher Regional Courts have
decided that a client does not only have the right to get the kickbacks back, but also to get
compensated for losses. The reasoning was that the client would not have chosen the wealth
manager if he had known that there was a conflict of interests. Therefore, the court has
shifted the burden of proof whether the client knew about any kickbacks on to the bank.
In Switzerland, arguably the global center of wealth management, the High Court decided, in
2006, that kickbacks belong to the clients. They can require a full disclosure and also return
of all kickbacks the wealth manager received from third parties for managing their portfolio
–for the last ten years of their client relationship.
In the USA the financial regulator SEC recommended in 2004 that brokers be required to
disclose all commissions they receive, as well as fees their clients can expect to pay for a
mutual fund. This was a reaction after the SEC found out that 14 out of 15 examined brokers
got secret kickbacks from certain mutual funds for pointing clients to their funds. The
proposed rules would also require the wealth manager to provide clearer disclosures on
their fees and expenses and on any conflicts of interest before an investor purchased shares
in a fund. Since then various brokerages have been paid millions in fines for receiving
mutual funds kickbacks. There is an ongoing criminal probe of kickbacks that companies
allegedly paid to manage the Ney York State pension fund.
Nevertheless, while the legal enforcement against kickbacks shows promising first steps,
most of the wealth managers still don’t feel the need (or are forced) to disclose their
kickbacks. One reason is the lack of awareness and also neglect on the client side - not asking
for disclosures or even signing – often legally worthless – clauses that they give up their right
for disclosure. Secondly, the legal changes take a long time to go through the court system.
Many times, wealth adviser threatened by legal actions from their clients settle out of court
instead of facing public trial.
4. How much you should pay

The amount you should pay for your wealth management is determined by your ability to
analyze the various cost factors and your willingness to pressurize your wealth manager.
Research shows that your total costs of wealth management in most cases should not exceed
1% of your total assets per year.
It is time well spent to understand each cost driver, because you find out what levers you
have and how you can cut costs without hurting performance. This “self-training” is even
more important since the market is not very transparent. Without a deeper knowledge of the
different pricing models as well as hidden costs, it will be very difficult for you to compare
offers and select the best one for your needs.
For the overall rules on how to choose your wealth manager, please see our Guide Selecting
the Right Wealth Manager on www.MyPrivateBanking.com. To optimize your total costs of
wealth management, you should follow six major steps – no matter whether you are a first
time investor with your wealth manager, or already have a wealth manager and want to
check and renegotiate the fees.
Step 1: Choose the right strategy

Successful wealth management requires a long term perspective – both with regard to
returns and costs. Consequently every client should carefully analyze his needs, restraints
and abilities in respect to wealth management to choose an investment strategy best for him
and his wealth. However, while individual strategies might differ, a few essential points
should be part of every strategy: see yourself as an investor and not trader; avoid a high
turnover; do not try to time the market and only buy products you fully understand. Please
see our Guide Making the Right Asset Allocation on www.MyPrivateBanking.com for the basic
rules of a successful investor and to do a comprehensive Self-Assessment.
Step 2: Choose a wealth management best for your investment type

After determining your type of investor and right strategy, choose the type of wealth
management best for you and consequently, for your costs.
 Option 1: Do it yourself and safe costs: If you feel you know what you are doing
and want to manage your portfolio completely yourself, a simple account with a
good online broker will be sufficient. This will be the most cost effective way to
manage your wealth.
 Option 2: Take advice and control costs: If you feel competent, but still would like
to take advice and suggestions, the advisory mandate could work best for you. You
can check if you like the products and control the turnover in your portfolio. After
a certain number of transactions, it might be advantageous to move from a

transaction-based to “flat-fee” model.
 Option 3: Outsource and watch your hidden costs: “All-in-fee” models most likely
fit best the inexperienced investor who would like to entirely outsource his wealth
management. However, while the “all-in-fee” protects you from the unforeseeable
costs of high turnovers, a full outsourcing of your wealth management opens the
door for products with high hidden costs.
Step 3: Choose a price-competitive wealth manager

Once you decide on your investment strategy and preferred form of wealth management, do
your research to get to a list of wealth managers you would like to meet. Talk to each of
them, ask for a proposal and determine a short list. There is no empirical evidence that a
higher fee of a wealth manager goes with a higher performance. Nonetheless, not only the
costs, but also the competency of the wealth manager has to be taken into account.
Step 4: Gain transparency and choose cost-effective products

You can only determine your total cost of wealth management once you know all the cost
drivers. Most wealth managers are not very keen to disclose the hidden costs upfront, and
have them put in small-print (or not mentioned at all). From wealth managers, demand a full
disclosure of all kickbacks received from third parties. From banks, demand the disclosure of
the total costs of in-house products. Understand if and how much they profit from high
turnovers and the use of certain products. If the wealth manager aims for a long term client-
relation and a win-win-situation, he will tell you. Once you have collected all the
information, decide what products and strategies your wealth manager should and
shouldn’t not use.
Step 5: Take out extra services you do not require

Many times wealth managers offer a wide range of services beyond the pure management of
your assets. These can be legal advice, tax consulting, financial planning and fiduciary
services. Of course, you have to pay for it, either on a per-use basis or as part of an “All-in-
fee”. Check carefully which services you really need from your wealth manager. For the
services you require, check if a third party might be better equipped and more cost effective
than the wealth manager. Take out the services you do not need and consequently, ask for a
reduction of fees.
Step 6: Negotiate, negotiate, negotiate!

While the majority of the wealth management clients will negotiate when buying a new car,
only the minority negotiate with their wealth manager – in spite of the far higher savings
that can be achieved by reducing the costs of wealth management. Analysis shows that less
than one-third of clients negotiate. While, in fact, they can negotiate down the stated fees by
10% to 20% without any difficulties.
Figure 6: Big Potential for Negotiations
Investment Average decrease in % Little or no difficulty

Amount (USD) from stated fees obtaining fee reductions
$1m to $5m 11.2% 91.2%
$5m to $10m 21.4% 100%
$10m + 31.1% 100%
TOTAL 20.9% 96.7%
n = 263 affluent US-Investors in 2007

Source: Prince & Associates
Fees of wealth managers leave enough room for win-win-situations even after cutting the
fees. However, the success of the negotiation depends on three main factors:
 Be informed: Ask for offers from various wealth managers, and if possible, talk to
other clients of wealth managers to get a feel for the market, and to be able to argue
with data. Understand the differences in fees, check if they are caused by different
levels of hidden costs, and know if and what kickbacks the wealth manager
receives.
 Be precise: Wealth management is complex and has a variety of cost drivers. Be

clear on the cost drivers you want to reduce, to avoid paying a decrease in direct
fees through higher hidden costs. Be precise on the percentages of the fees you are
willing to pay and communicate them clearly.
 Be determined: As in every negotiation, the “success” is determined by your

willingness to walk away. Based on your research and desire to work with this
specific wealth manager, determine the fee structure you favor and the maximum
you are willing to pay. Then stick to your bottom line. After all, wealth
management is a buyer’s market.
5. Appendix:
Catalog of questions to your wealth manager on fees and costs:
o What is included and not included in fee of the wealth manager?
o To the adviser, directly: How is your personal remuneration determined?
o How high are the custodian and transaction fees charged by the custodian
bank?
o How many transactions do you expect per year?
o How high are the total costs of the chosen/ recommended products?
o Are there any other hidden costs?
o Will kickbacks from banks be reimbursed to the client?
o Will kickbacks from products issuer be reimbursed to the client?
o Will all costs and fees be displayed separately?
o How is the performance of my portfolio calculated?
o How much do I have to pay for extra services, e.g., tax statements, legal
advice?
o What levers do I have to reduce the costs?
o Will you take on costs for the transfer of my asset portfolio that my
current wealth manager might charge?
o What is your best offer?
Not Investment Advice
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particular investment objectives, financial situations, or needs of individual investors.
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Cut The Costs of Wealth Management

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Cut The Costs of Wealth Management

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Independent Advice to Get More out of Your Wealth Manager

Cut the Costs of Wealth Management

2. Small Numbers Have A Big Impact On Your Wealth

Costs Add Up Enormously Over Time

Figure 1: Costs can add-up enormously over time

Example: Investment amount 1 million USD, 7% performance p.a., 3 % Costs p.a.

Year 1 Year 3 Year 5 Year 7 Year 9 Year 10

Compound Profis vs. Compound Costs (in USD 1`000)

Costs Take A Lot Of Your Performance Away

Investment amount: 1 million USD

Lost Profit after Total Costs of Wealth Management

10 years 967k -148k -296k -444k -591k

15 years 1.759k -269k -538k -807k -1.076k

20 years 2.870k -439k -877k -1.316k -1.755k

Table 1: Lost Profit with different Total Costs of Wealth Management

Never forget inflation

3. Costs you can see – and costs not shown to you

Cost Drivers in Wealth Management

Figure 2: Many Costs Cut your Profit

Gross Profit Product-Costs

Pricing models only report the direct costs

Figure 3: Flat Fees show wide Variance

% of Wealth Managers offering certain flat fee (n=19)

0.8% 1,0% 1,2% 1,3% 1,4% 1,5% 1,9% 2,0%

All-In Fees p.a. (not negotiated)

Source: Survey of European Private Banks,

Hidden Costs come in many products and transactions

 Structured products: In recent years, structured products have been heavily

 Unnecessary transactions: In a pricing model based on transaction-fees, the total

Figure 4: Hidden Costs easily higher than Direct Costs

Pricing Model Investment (USD) Fees* Total Direct Costs (USD)

Total Hidden Costs of Portfolio 16.300 USD

= Total Costs of Wealth Management 31.800 USD = 3,2% p.a.

Kickbacks – the way to pay your wealth manager twice

 Kickbacks by banks: These kickbacks are in particular relevant for independent

 Kickbacks by product issuers: A multitude of financial products are competing for

Figure 5: Wealth Managers receive huge Kickbacks

Product / Services Avg. Kickback in %

Transaction Fees 40% - 50%

Management-Fees Funds 40% - 50%

Front Load 90% - 100%

Structured Products 40% - 50%

Source: MyPrivateBanking Expert Interviews

Kickbacks – costly, not transparent and increasingly illegal

4. How much you should pay

Step 1: Choose the right strategy

Step 2: Choose a wealth management best for your investment type

a certain number of transactions, it might be advantageous to move from a

Step 3: Choose a price-competitive wealth manager

Step 4: Gain transparency and choose cost-effective products

Step 5: Take out extra services you do not require

Step 6: Negotiate, negotiate, negotiate!

Figure 6: Big Potential for Negotiations

Investment Average decrease in % Little or no difficulty

$1m to $5m 11.2% 91.2%

$5m to $10m 21.4% 100%

$10m + 31.1% 100%

TOTAL 20.9% 96.7%

n = 263 affluent US-Investors in 2007

 Be precise: Wealth management is complex and has a variety of cost drivers. Be

 Be determined: As in every negotiation, the “success” is determined by your

o What is included and not included in fee of the wealth manager?