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Wealth managers’ big dirty secret

Would you buy the car in this transaction? First, there is no sticker price, you get a “customised” deal, with a structure and details nearly impossible to weigh against other car offers. Next, there’s no readily available data to fairly rate the fuel economy, repair history, and overall quality against industry benchmarks.

You would likely walk away from that deal, but thousands of investors endure just such a slippery system when shopping for wealth managers.

The missing ingredient is transparency, and elite wealth managers around the globe – and particularly in the US – have long been stingy about publicly disclosing data on fees and the performance of standard portfolios. A recent analysis of the websites of 40 of the world’s largest wealth managers by Switzerland-based MyPrivateBanking research found few divulging useful fee or performance data.

“In a nutshell, [such] disclosure has not been done because this would really heat up competition,” says Steffen Binder, research director for MyPrivateBanking. “Wealth managers are not used to competing on price and performance.”

Mr Binder says this inclination towards secrecy obscures good returns and favourable pricing just as much as it covers up poor-performing portfolios and fees that bake in “kickbacks” to fund managers, and other embedded costs effectively hidden from clients.

MyPrivateBanking rated the wealth managers on a set of best practices, including disclosure of each broad category portfolio’s performance history for at least three years, as well as a detailed accounting of fees for standard services and commonly added charges. It found only 18 per cent of the 40 wealth managers were offering precise,
quantitative data on fees, and just 8 per cent publishing at least a three-year track record on performance on their discretionary accounts.

The US fared the worst, with not even one large wealth management player scoring a single point on the consultant’s seven-point scale for disclosing performance data, and only one, Deutsche Bank, scoring points for “precise” fee disclosure.

Mr Binder says the US tends to have less use of discretionary portfolios, but the firms in the study include many that offer some form of them.

Even when clients extract performance and fee data from their managers, it’s often difficult to fairly compare them to the market. That dilemma prompted the New YorkPage based Institute for Private Investors to develop a course with the University of Pennsylvania’s Wharton School on how to query wealth managers for its 345 investor
members, 80 per cent of whom have $50m or more in assets.

“You need to know what to ask,” says Charlotte Beyer, chief executive of the IPI. “You have to ask for data in the way that the [chartered financial analyst] standards call for, ask how many accounts they have, how much they’ve had in flows in and out, and ask about their performance attribution. [Our members] learn just enough to be dangerous.”

Some in the private banking world contend that regulatory constraints and the customised nature of many high-end client portfolios make wider disclosure impractical.

Nevertheless, legal departments could find a way to properly disclose performance data if asked, Mr Binder says. And while wealth managers cannot be judged on customised portfolios, many clients still use their firm’s standard investment strategies – crafted by their expert investment committees – as a core element or starting point.

Nor do complaints about the technological burden of sharing fee data still carry weight now that various vendors address those challenges, responding in part to expectations that regulators will continue pushing for greater disclosure on fees, says Chris John, chief executive of Boston-based Bonaire Software Solutions.

“Having this data on spreadsheets or tucked away in [staff members’] heads won’t cut it any more,” Mr John says. “Auditors will want fee information [that is] more documented and repeatable. And it will have to be presented to the regulators and customers in a way that makes sense, so they clearly understand how the fee breaks down and can
see, ‘Is this a fair fee structure?’”

What is most fascinating about these shrouded business practices is how wealth managers are swimming against a tide in the UK, US, Europe and Australia that is pushing toward greater openness.

Clients are awakening to how such data can reveal those wealth managers who “massively underperform the market or massively overcharge” with fees that eat away at net returns, Mr Binder says. And scrutiny from regulators is also mounting in a surge of financial reform legislation.

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