How Much Should You Pay Your Wealth Manager ?

The amount you should pay for your wealth management is determined by your ability to analyze the various cost factors (as we did in our previous articles on pricing models and hidden costs of wealth management) 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. 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.

Wealth Management Services By HSBC

Category I
Category I pertains to mutual fund schemes which invest predominantly in equity and equity-related securities/instruments and structured schemes. Under this category, for investment transactions through the Banks net banking (RIS Online), the transaction fee will be levied at 1.5% of the transaction amount. Where the customers mutual fund AuM is above `50 million, for investment transactions through RIS Online, the transaction fee will be levied at 1.25% of the transaction amount.

Category II
Category II pertains to mutual fund schemes which invest in nonequity and non-liquid funds, such as Monthly Income Plan (MIP), Fixed Maturity Plan (FMP), short-term debt funds, long-term debt funds (that includes gilt, fund of fund-debt or any other debt oriented non-liquid non-equity schemes). Under this category, for investment transactions through RIS Online, transaction fee will be levied at 0.5% of the transaction amount.

Switch transactions:
No charges will be applicable for switch transactions between mutual fund schemes within the same asset class* of an AMC. Mutual fund transaction charges shall apply as per Table-I for switch transactions between the mutual fund schemes of different asset classes** of an AMC.

Systematic Investment Plan (SIP)

Plan 1: SIP transaction fee is recovered at the time of execution of each SIP transaction at the standard tariff rate . Plan 2: SIP transaction fee is recovered upfront at a preferential rate (as shown in Table-II) on the committed SIP transaction amount for every 12 month period. This means, in year one SIP transaction fee will be recovered upfront in month 1 (for the period from month 1 to month 12) and similarly for the following years till the end of the SIP plan. Fee recovered upfront will not be refunded in case of premature cancellation, discontinuation of SIP plan or nonexecution of SIP transactions due to insufficient funds. Please refer to Terms and Conditions for further details.

 Example: Mr. Kumar holds MF investments through the Bank. In January 201x Mr. Kumar books a SIP of `10,000 per month in an equity fund for 36 months. His MF AuM through the Bank during January 201x is `21,00,000.

Some Hidden Costs

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.

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.

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.

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 clients 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.