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.