Is 1% Really the Total Cost of Your Private-Banking Relationship?

A management or advisory fee of 0.8% or 1% can look like the price of a private-banking relationship. It may be an important part of the cost — but it may not be the complete picture.

Over more than 35 years in private banking, I have seen how easily a single percentage can become the entire discussion. Yet the economics of a relationship may also include custody, the costs of investments held in the portfolio, trading, foreign exchange, financing and the terms attached to more complex products.

That does not mean every bank charges every cost, or that a higher-cost relationship is necessarily poor value. Private banking can provide real value through investment expertise, administration, custody, reporting, financing and an experienced relationship manager.

The useful starting point is simply this:

What did my entire banking relationship cost me over the last 12 months — and what exactly was included?

1. The fee you see

The advisory or discretionary management fee is normally the cost clients recognise most easily.

In an advisory relationship, the bank makes investment recommendations while the client retains the final decision. In a discretionary mandate, decisions within an agreed framework are delegated to the portfolio manager.

Knowing the fee matters. But the percentage only becomes meaningful when the client understands what it covers.

What is included in this fee — and what is charged separately?

Custody may be one separate layer. Its cost can depend on the assets held, portfolio size, markets involved and the individual arrangement. Two clients at the same institution may therefore have very different overall economics.

2. The costs inside the portfolio

The cost of managing a portfolio and the costs of the investments inside it are not necessarily the same thing.

Funds, for example, can have their own ongoing expenses. Different share classes of the same fund may have different cost structures. Other investment vehicles may include administration, structuring or product-specific costs.

There may also be product-related compensation. Depending on the product, jurisdiction and legal arrangement, a bank, distributor or another entity within a financial group may receive compensation connected with the distribution or placement of an investment product.

The important question is not simply whether such compensation exists. It is whether it is disclosed, how it is treated and how it affects the economics of the client relationship.

What does it cost to manage my portfolio — and what do the investments inside that portfolio cost?

These are two different questions.

3. The cost of implementing decisions

The cost of buying or selling an investment is not limited to the commission shown on a trade confirmation.

Depending on the transaction, the full economic cost may include execution commissions, exchange and settlement charges, stamp duties or transaction taxes, bid-ask spreads, foreign-exchange costs, product entry or exit charges and, in some cases, the effect of liquidity on the price achieved.

The bid-ask spread is a simple example. It is the difference between the price at which an asset can be sold and the price at which it can be bought. It may not appear as a separate line on a statement, but it remains part of the economics of executing a trade.

Foreign exchange deserves the same attention. A client may earn in Swiss francs, buy a US-dollar investment and later convert the proceeds into euros. The investment transaction and the currency conversion are separate economic events.

Turnover matters as well. A portfolio that changes frequently may have a very different cost profile from one that trades only occasionally. This does not make trading inappropriate. It means that the client should understand the total cost of implementing those decisions.

4. Where complexity adds another layer

Structured products and financing require a different way of thinking about cost.

The economics of a structured product may incorporate derivatives, issuer pricing, distribution, structuring and the underlying assets. If the client wants to exit before maturity, market conditions, liquidity and secondary-market pricing may also matter.

Lombard lending and other forms of borrowing can be useful in certain circumstances, but they introduce interest costs, margins and additional risk. The relevant question is not whether financing is inherently attractive or unattractive. It is whether the client understands how it interacts with the rest of the wealth structure.

What am I buying, how is it priced, what risks am I accepting and what happens if I need to exit?

An illustrative CHF 5 million relationship

Consider a hypothetical CHF 5 million private-banking relationship.

Illustration only. These figures are not a benchmark, market quote or recommendation. Actual costs vary by bank, mandate, assets, products, jurisdiction and individual agreement.

Not every economic cost in this example is revenue retained by the bank.

Some costs may reflect fund expenses, taxes, market liquidity, external execution or third-party services. The purpose is not to treat every cost as a bank fee. It is to understand the full economics of maintaining and implementing the relationship.

Questions worth being able to answer

Before the next private-banking meeting, a client should be able to answer a few straightforward questions:

1. 1What were my total costs over the last 12 months?
2. 2What exactly is included in my advisory or management fee?
3. 3Which costs are charged separately?
4. 4What ongoing costs exist inside the funds and products I hold?
5. 5How are my foreign-exchange transactions priced?
6. 6What did buying and selling investments cost me in total?
7. 7Are product-related payments received, and how are they disclosed and treated?

Relevant information may appear across periodic cost reports, fee schedules, mandate agreements, custody statements, transaction confirmations, fund documentation, structured-product documents, foreign-exchange records and financing agreements. It may not always appear in one place or under one definition.