In Swiss private banking, costs are not talked about and are certainly not publicized. Clients only receive more detailed information when they request for an initial consultation and explicitly ask about costs. But the “official” fees usually don’t include all the costs which reduces the customer’s net return.
In this article, we will cover the hidden costs and not the usual fees such as advisory, custody account management and transaction fees (purchases and sales of securities). You can find information on costs in Swiss private banking here. With the insights from this article, you should be able to critically examine your own securities account for hidden costs.
Exchange Rates
Exchange rate costs can be hidden very inconspicuously. Most private banking clients hold a geographically and therefore currency-diversified portfolio. When buying and selling, currency changes are therefore always necessary. Although the exchange rates applied are shown transparently in the statements, their fairness is difficult for clients to judge, as exchange rates move constantly over the course of the day. You can get an approximation of the bank margin by comparing your billing rate with the published average exchange rate for the same day.
What can you do about hidden exchange rate costs? It is standard practice for most providers to maintain accounts in euros and US dollars. This means that all purchases and sales in the relevant currency area can be settled via the respective account. However, caution is advised if minimum or flat fees are charged for each account, as these can cancel out the savings on exchange rates. A second option is to agree to a specific margin for foreign exchange transactions with the provider. This makes the costs transparent.
Investment Products
Investment products provide ample opportunities to hide costs. On holdings of individual investments, i.e. shares and bonds, the provider can only charge the agreed costs. This is why other products are often added. Why are margins on these investment products unfair? Customers pay fees for advisory or wealth management mandates that are based on the value of the custody account. In the case of other, hidden fees, customers pay the fees twice.
1. Structured Products
Structured products can hide margins that customers easily overlook. In the case of the popular barrier reverse convertibles, for example, it is almost impossible even for experts to quantify the calculated costs. Although certain fees are shown, the models used to calculate the option prices contained in the products can lead to very different prices with higher or lower margins. Structured products customized for individual clients are very popular. With these, the advisor can determine the margin for each product or each client individually.
What can you do? In principle, you can justifiably question whether structured products are even necessary for your portfolio or whether you could achieve your investment objective only with individual investments. Various providers do not use structured products at all, and these are by no means the poor performers. Fair providers waive their own margin for customized structured products in custody accounts for which advisory or wealth management fees are paid. However, as “structured products” are usually configured using a tool from a third-party provider, their margin cannot be avoided.
2. Investment Funds
Investment funds are undoubtedly useful components in customer portfolios. But here, too, it is important to take a close look. For customer portfolios of less than half a million, a diversified investment in individual securities is very difficult to structure efficiently. Investment funds are indispensable here. However, the wealth manager has a choice of expensive or low-cost investment funds. The use of so-called “retail tranches”, i.e. investment funds with full fees, is unfair if a wealth management or advisory fee is also charged on these portfolios. Wealth managers can use the “institutional tranches”, whose costs are far lower than the “retail tranches”. With the “institutional tranches”, the wealth manager does not receive any retrocessions.
The cost differences between active and passive funds should not be neglected. If an asset manager does not want to or cannot cover a certain market with individual securities, for example, he often resorts to investment funds. This is legitimate and sensible. The client is almost always better off with passive and therefore less expensive funds than with expensive active funds. The difference in costs can easily amount to 1% per year if “retail tranches” are used.
Account Management Fees
Although account management fees are not hidden, they are often forgotten when only looking at the securities account. Fortunately, most private banking providers do not charge account management fees. However, there are some that charge four-figure amounts per year for account management. Even if they can be “negotiated away” by larger customers: FinGuide recommends staying away from providers with such practices as a matter of principle.
Conclusion
Hidden costs should not be underestimated. It is quite common for the actual costs of a securities account to be up to double the stated costs. Such practices are usually linked to corresponding incentive systems for advisors: Advisors earn high bonuses if they squeeze the highest possible margin out of their clients. If you are not a professional yourself, it is difficult to defend against it. Having this in mind, take a critical look at your securities account and change providers if you are not being treated fairly. FinGuide will support you in this. You can find more information on our homepage.
