Switzerland is famous for private banking – providing specialized wealth management services to high-net-worth individuals. In Switzerland, wealth management is often generically referred to as private banking. The number of genuine private bankers as per Swiss banking standards (bankers which are fully liable for asset losses) has dwindled in recent years. But many retail banks offer similar wealth management services.
Entering into a private banking relationship without fully understanding what you are getting yourself into can result in poor growth or even losses. Before you sign up for a wealth management service, you should be aware of these common pitfalls and understand how to avoid them:
1. Being wowed by a fancy office
Luxurious offices in prime locations are not necessarily a bad thing, and in some cases a bank’s branch locations can tell you something about the clientele they speak to. However, it is important to look past the “storefront” and into the bank’s actual performance, yields, rates and fees. It is also worth noting that large offices sitting on key real estate generally represent enormous costs which may be passed on to customers in the way of high fees and charges.
2. Falling for a convincing sales pitch
Private banking is a relationship-based business in which private bankers play the role of salespeople attempting to sell you on their services. Feeling comfortable with your wealth manager and being able to openly discuss your goals and ask for advice are important. But while a good relationship is desirable, returns on your investment and low costs should always be the deciding factors.
3. Not understanding how private banks work
Many people assume that private banks earn money by investing the assets they manage. While this is true in part, private banks generate a large part of their income by charging fees and commissions for services rendered to customers. Many fees and commissions are levied on a per-use or per-transaction basis, so the more intensively your wealth is managed, the more you pay. A good private bank is a bank which delivers high returns in relation to banking costs.
4. Failing to compare offers
Private banking is, in part, a trust-based business. Many people feel most comfortable either entrusting their wealth to well-established and trusted banks, or simply upgrading to the private banking services offered by banks which they already work with. While convenience and the bank’s reputation are important, the fees you pay have a much more direct effect on your wealth. The differences in costs charged by different providers for the same services can add up to tens of thousands of francs every year. Comparing private banking costs – using the moneyland.ch private banking comparison, for example – is an easy way to get a clear picture of potential savings.
5. Not negotiating
Standard private banking services offered by retail banks like Migros Bank and some cantonal banks normally come with fixed fee schedules. However, if you are wealthy enough to be sought out by a fully private bank for high-net-worth or ultra-high-net-worth individuals (like Julius Bär or Bank Vontobel), you will often be able to negotiate.
As a general rule, the more assets you bring to the table, the better your chances of negotiating lower fees. If you find the bank’s administrative fees are too high, ask them to make you a better offer. Private banks are normally keen on bringing in new capital and may be willing to bend in order to gain you as a customer.
6. Paying for unnecessary services
It isn’t uncommon for banks to include or even recommend services which you do not actually need. Many private banking services make use of structured products, which typically come with hefty transaction fees.
As a rule, stay away from products if you do not understand how they will benefit you. Ask potential wealth managers for detailed breakdowns of their investment strategies, the services they provide and the costs associated with each service. Get a second opinion (from a wealth management consultant paid on a fee-only basis, for example), and do not sign up for services which you do not need and those that do not meet your risk-tolerance preferences.
7. Not understanding your bank’s investment strategy
If you are going to entrust your hard-earned fortune to a private bank and pay them to manage it, you will want to clearly understand what the bank will do with that money and what is in it for you – in no uncertain terms. Ask questions and then ask them again. Do not hand over the money unless you are completely confident that you understand how it will be invested, what you can expect to earn and what you will pay for the service. Your bankers should be able to answer all your questions clearly and explain their investment strategy in a way that clearly underlines the benefits and risks involved.
8. Investing through actively-managed funds
The choices of investment funds offered by private banking services is also key to avoiding high costs. Conventional, actively-managed funds are powered by professional investors who actively invest assets. While a handful of actively-managed funds have successfully reaped returns which far outdid average market rates, the vast majority have not been able to outperform standard market rates.
At the same time, when you invest through actively-managed funds you pay high administrative fees because you are paying professionals for their time. Passively-managed funds, on the other hand, simply follow a market index and require very little administration. The yields of passively-managed funds (like ETFs) are often comparable to those of actively-managed funds, but the costs are generally far lower.
9. Not considering alternatives
If you have come into money (after founding a successful business or receiving a large inheritance, for example), you may be tempted to “upgrade” from consumer banking to private banking. Often, banks will prompt customers with a healthy bank balance (typically between 50,000 and 500,000 francs) to sign up for private banking services.
However, even if you have the required assets, private banking is not necessarily worth the higher costs. Unless you actively engage in activities that call for private banking services (international or offshore investments, for example), investing in ETFs through low-cost online brokers may provide better value for money.
You can use the moneyland.ch online broker comparison tool to find the right broker for your needs. Robo advisor services (computer-based investment consulting) like True Wealth can help you formulate a passive investment portfolio at a much lower cost than conventional wealth management consultants.