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Fees limits: Swiss advisers reveal how much they charge their clients

Independent asset managers explain how they face challenging regulation when it comes to their fees structures.  

Tightening regulations have undeniably increased the cost of running a business, prompting some advisers to increase their fees. At the same time, competition is fierce and many independent asset managers are under pressure to cut fees to attract clients.

Over the next slides Swiss advisers tell us how they approach the fees dilemma.

This article originally appeared in the June 2017 edition of Citywire Switzerland magazine.

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MARC MORET & GIANPIERO STURZO

Lobnek Wealth Management

Geneva

The importance of fees has become more apparent recently. There are several reasons for this. The first is the current interest rate environment. When interest rates allowed you to expect an annual risk-free return of 5%, stealthy fees tended to be easily absorbed in the process. It is quite a different story when rates are close to zero, or even negative. Fees suddenly stand out like a sore thumb.

In this environment, an investment will have to perform first to recoup the fees, and then hopefully to generate an additional return. Given current circumstances, improving your performance almost certainly includes reducing your fees.

The second reason is transparency. It is only since the 2008 crisis that investment professionals have been forced to disclose fees and other related revenues in detail. Before then, fees were either misrepresented or omitted altogether, as complex cost structures allowed them to be embedded in the performance calculations without necessarily being disclosed.

Today, there is clear downward pressure on fees. But at the same time, complex regulatory requirements are driving investment professionals’ costs up. This situation clearly favours larger institutions that can spread their compliance costs over a larger number of clients and assets under management. It will be increasingly difficult for small companies to remain profitable.

This brings us back to one of our favourite topics: conflicts of interest. We believe they must be avoided at all costs to guarantee ethical business practices and sustainability for our industry.

Something is terribly wrong in a system where finance professionals and clients have opposing interests. Establishing a transparent and fair level of fees for the services provided is central to establishing a relationship based on mutual trust and respect.

In our opinion, management fees for traditional asset management should be less than 1%.

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KASPAR GROB

Helvetic Trust

Zurich

Relationships with custodian banks and execution are key when it comes to defining fees. We are focusing on improvement of our services in order to maintain our fees at their current levels, but if MiFID II is implemented we might consider adjusting them.

Generally the competition is increasing. When I started there was a place for everyone, but those days are over. If you compete with other companies in the field, then you compete with the fees they offer as well. Instead of lowering our fees we are trying to improve our family office services offering.

However, you cannot go completely against the market. A client is usually not prepared to pay more, and will tell you ‘I have offers from other asset managers, and you have to adjust your fees if you want me to stay with you’.

As a result, the question is not about increasing or decreasing fees, but what kind of services we offer to justify them. Many banks are much bigger than us but they don’t have three in-house approaches like we do. Those are trend allocation, investments in Switzerland and active bond management.

We don’t have a specific pricing model, but I think we are competitive in the market.

Nowadays everybody is focusing on the net new money, and we have been enjoying good momentum over the past six months. The accumulation of family office services that cover different areas, from risk analysis to yacht and aircraft management, contributed to the current performance.

But if we didn’t offer these services nobody would be waiting around for us, because there is a great deal of competition out there.

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HOLGER SCHMITZ

Schmitz & Partner

Brione sopra Minusio

Costs have risen sharply for independent asset managers over the past two years. This increase is a result of expenses including costly seminars and examinations for money laundering prevention and corresponding electronic data processing.

That’s why I adapted my fee model some years ago. For low-volatility portfolios I apply a fee of 1% of what was invested by the client. For labour-intensive portfolios, on the other hand, the fee ranges from 1.2% to 1.4%. I think the fee model of many independent asset managers will change because of MiFID II. The costs emerging from increasing regulations are then passed on to the customer.

In my opinion the legislator is unreasonably pushing up costs for independent asset managers. The client doesn’t get more protection or other advantages from these increasing regulations – the consumer does not benefit from higher regulation of the asset managers.

The service remains the same, although the costs and number of tasks for asset managers are increasing. The asset manager will then have to cover higher costs by introducing higher fees.

The customer has two options: either to pay higher fees or change provider. The costs that emerge as a result of stricter regulations are not compensated by higher returns. The client sees no benefit, only the asset manager has more unnecessary work to do.

This over regulation of the sector was initiated by the bank lobby, which wants to squeeze out independent advisers and asset managers from the market and create space for its own business.

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SÉBASTIEN LEUTWYLER

Capitalium Advisors

Geneva

Beyond the discussion on fees lies the important question of whether the management fees charged by the wealth manager represent his or her full remuneration or merely a fraction of it. In reality, the vast majority of the wealth management community continues to charge so-called ‘hidden’ fees on top of the visible management fees. Clients may know about them, but they don’t see them on the invoice.

And yet hidden fees are crucial in the profitability (sometimes survival) of most wealth managers. There are many hidden fees, including retrocessions from custodian banks and financial products, high-margin in-house products, and margins on the issue of structured products.

In reality, while some wealth managers are lowering their visible management fees, at the same time they are increasing their hidden fees to secure their profitability. This practice is pure marketing fallacy.

At Capitalium Advisors, we have adopted a zero retrocession policy, and management fees charged by our company represent our sole revenue stream. We are convinced this model will become a standard, simply because this is the only model that guarantees a total absence of conflict of interest. It also clarifies the wealth manager’s incentive to perform and ultimately build trustworthy relationships.

A transparent fees structure is a prerequisite for trust because it reduces the asymmetry of information that often exists between the clients and their financial advisers.

We apply the ‘1% all-in’ rule, where the 1% represents the maximum annual fees a client should pay for the management of their wealth. This 1% corresponds to a fair price that appropriately rewards the entire value chain, including custodian fees (bank), management fees (financial advisers) and any other additional ‘hidden’ fees that might still exist even if they shouldn’t.

In our opinion, wealth managers that focus on discounting fees only display a lack of innovation and weak resources allocation. Clients should question the sustainability of a business where a fee rebate is the unique argument.

Qualitative growth has never arisen from cost reduction efforts, and fees are meant to finance business improvement, not the wealth manager lifestyle. As Warren Buffet said, ‘price is what you pay, value is what you get’.

So far, the feedback we have received from our clients tends to confirm that our business model is going in the right direction. Our company’s growth in the past 12 months confirms that the ‘1% all-in’ scheme, together with a total commitment to improve the client experience every day, reflects what clients are expecting from their wealth managers.

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