There are many reasons why wealthy people entrust their money to a financial institution for management and do not manage it themselves. The agent may be a bank, an insurance company or an independent asset manager. The most common reasons for a delegation are that they do not feel confident enough to manage their assets themselves or that they lack the time and desire to deal with the capital markets. The decision to entrust a third party with the management of the assets is accompanied by a fee. In addition to the actual management fee, there are other types of costs. It is worth analyzing the costs when choosing an advisor. Even with an existing asset management mandate, the costs should be reviewed at regular intervals. One should know the total costs of the asset management. These costs are made up of the following three cost categories: Management fees, bank costs and product costs.
Management fees:
Management fees are usually calculated in relation to the assets under management and are invoiced once a year, half-yearly or quarterly. These costs are owed to the asset manager. In rare cases, a profit-sharing arrangement is negotiated. This fee is charged for client care, portfolio management including placing the corresponding securities orders with the custodian bank, research and analysis activities and for the administrative tasks required for this purpose.
Bank charges:
Custody account management fees are usually also calculated in relation to the assets under management and are also invoiced once a year, semi-annually or quarterly. In addition to these fixed costs, there are brokerage fees for securities orders and spreads in foreign exchange trading, which are only incurred in the case of effective trading activities on the part of the asset manager. In addition to these two types of costs, many private banks have a number of other sources of income such as account management fees, surcharges for a numbered account, a foreign relationship or, in the case of exotic securities, postage and packing costs.
Product costs:
Financial instruments such as collective investment funds, certificates or structured products have their own fee structure. If the asset manager works with such instruments, these costs are therefore also incurred. Especially in the area of alternative investments, these costs can be high. It is therefore necessary to weigh up the costs against the advantage of an exposure to such securities. If the portfolio contains only direct investments in bonds and equities, there are no product costs.
As mentioned at the beginning, everyone should know how high their total costs are. However, determining this is often time-consuming and requires specialist knowledge, as not all costs are transparent. The differences in the total costs of asset management solutions are sometimes striking. Special attention should be paid to the use of financial instruments and in particular to the bank’s own investment products. Often a private bank receives portfolio commissions when using financial instruments and the fee for proprietary solutions is collected in full anyway. A precise analysis of the total costs is also important, especially because the costs have an impact on net performance. We at FINAD AG believe that it is also part of the task of a good asset manager to inform clients transparently and systematically about their total costs.
