Banks have tried to move clients to discretionary-only portfolios – those that choose a strategy and then delegate the management of the portfolio to the bank – where they can charge a flat fee, and manage the entire portfolio.
In this way, banks can protect themselves against increased regulatory requirements around advisory fees. However, clients are wary of handing complete control over and so take-up rates have disappointed banks.
On the other side, financial institutions have tried to charge for purely execution accounts like brokerages to avoid complications around charging clients directly for advice.
However, the middle-ground is where most clients will sit – wanting advice and management, but with some independence. In this context, UBS, on its home turf of Switzerland and increasingly for clients abroad, is attempting to redefine how to charge for this “middle way”.
Last year, the bank introduced a new contract with a flat fee for clients who want advice, but not a purely discretionary portfolio. That fee pays for brokerage, custody, administration of assets and a guided asset allocation that is guaranteed to meet certain quality criteria.
|Christian Wiesendanger, head of wealth management Switzerland at UBS|
In the first seven months of the pilot, 2,000 Swiss clients with more than SFr2 billion signed up. The fees are between 90 basis points and 120bp, depending on the amount of client assets. “Advising on SFr1 million costs more than on SFr10 million,” says Wiesendanger.
It is the quality agreement that Wiesendanger says is the most challenging for the industry to accept, adding: “Institutions don’t feel comfortable extending a guarantee, so we haven’t seen anything similar yet from our peers.”
How do you guarantee quality advice and asset allocation? Wiesendanger says it would simply be a PR disaster not to.
“Firstly, we have the technology to check every day against market risk and counterparty risk,” he says. “If we don’t follow some stocks then we announce that. And each day the adviser gets a list of which clients’ portfolios seems at risk and what to propose to fix it.
“And then we promise a deadline of five days for the adviser to reach out to the client and advise a change.”
For purely discretionary clients, UBS has changed its fee to avoid a lack of clarity around retrocessions – the commission paid by a custodian bank to a portfolio manager.
“Up until 14 months ago, the clients paid 80% of the fees directly and then there were some collective investment instruments, like mutual funds, that bore retrocessions,” says Wiesendanger.
“Now clients are questioning the legitimacy of retrocessions – so we chose to do away with them by autumn last year – threatening 20% of the business P&L. To cope with that threat, we chose to bill the clients 100% instead, but now [it’s] all fully transparent and clear what we are charging for upfront. And clients have accepted that.”
Wiesendanger says regulatory discussions threaten this middle ground of advice and how to charge for it, and he hopes the UBS approach will be regarded as a standard for the industry to adopt.
“The problem is that regulations are forcing banks from a profitability standpoint to offer only discretionary or execution accounts – and that makes the market poorer in terms of choices for the client,” he says.
“It would drive some small banks out of existence as the middle way requires just too much documentation and oversight. It would lead to an oligopolistic market place, which is not a good thing for wealthy individuals.”