Costs or Return? Which Is More Important?

There is currently a trend towards greater cost awareness in Swiss private banking. Robo-advisors are challenging traditional providers with more favorable prices. As an independent private banking specialist, FinGuide has data on both prices and the returns achieved. In this article, we want to address the question of which of these two factors is more favorable for investors.

The Needs of a Typical Client

Let us examine a typical client here at FinGuide: the client has assets of three million francs and would like to invest her funds in a balanced mandate. Let's roughly define this as an investment with a maximum equity component of 60%. As the client does not have a particularly generously endowed pension fund, the investment performance will have a significant influence on her lifestyle after retirement. The capital stock should be preserved for her children if possible. She is now faced with the question of whether she should pay more attention to low costs or (historic) returns when choosing a provider.

Costs

Focusing on costs has an unbeatable advantage: costs are always foreseeable for the future. Favorable providers generally remain favorable in the long term. And if an unpleasant price increase is imminent, a competitor with favorable prices can be found quickly. What does favorable mean in specific terms? The most favorable providers are the so-called robo-advisors. The total costs of a robo-advisor consist of two components: Management fee (ideally including custody account fee and transaction costs) and product costs (fund/ETF). Robo-advisors are favorable in terms of both components: the management fees for low-cost robo-advisors are around 0.5%-0.6%. Mostly ETFs with low costs are used. If we assume 0.2% for ETF fees, this results in total costs of 0.7-0.8%. This means that our sample client saves around half a per cent per year in costs compared to an active wealth manager.

Objectives of the Providers

The low-cost wealth managers generally pursue a passive investment approach. In other words, they do not try to beat their reference portfolios, but to lose as little as possible against these defined benchmarks thanks to low costs. Active wealth managers, on the other hand, aim to outperform a defined benchmark or generate a certain excess return compared to a risk-free interest rate. Do they succeed?

Returns

This is where you will see big differences. Many banks and wealth managers fail to regularly outperform their benchmarks. So if you are a client of one of these providers, you would be better off with a robo-advisor. When selecting the banks and independent wealth managers we work with, FinGuide places a strong focus on the returns generated for clients. It turns out that there are private banks and independent wealth managers that exceed the reference figures more often than they miss them.

Here is an example over 5 years with real figures for our model client who invested three million in a balanced strategy. We use the average of balanced wealth management funds from UBS, Credit Suisse and Swisscanto as a benchmark. This is because there is no "single correct" benchmark consisting of indices for a balanced strategy in Swiss francs and we don't want to get lost in a discussion about it here.