For the client of a bank, the relationship manager is a person in a position of trust. He has all the financial know-how available and helps clients reach their goals. In his essay for finews.first, Matthias Hunn raises the question whether bankers always act in the interest of clients.
This article is published on finews.first, a forum for authors specialized in economic and financial topics.
Asymmetries of information are a big issue in the provision of medical services. If a patient with a stomach ache doesn’t know what to do about it he will consult his medical adviser, in other words, his doctor. The doctor, in turn, will analyze the problem and propose a solution, a therapy.
Given his advantage of information, the doctor has the means to influence the degree of medical advice and an opportunity to earn money from the prescription of drugs. He can suggest that the patient should return to his surgery in two days' time for a check-up or agree with the patient to return only if the therapy doesn’t work within two days.
Normally, the patient will not be able to judge which of the suggested procedures makes more sense for him. A doctor with extra capacities thus has a way of generating additional income if need be. A tried and tested measure against this supply-induced demand is to limit the number of medical surgeries.
«It is definitely worth looking at both the disclosed and the hidden costs»
As advisory services in private banking aren’t measured in minutes, unlike those of medical doctors, the symptoms of asymmetries of information aren’t the same. It is worth looking at both the disclosed and the hidden costs. The prices of private-banking services aren’t publicly known because of the discretion of the providers.
To be precise: private banks aren’t displaying their fees on the internet. This makes it hard for an unexperienced client to determine whether the price offered for advisory services or wealth management mandate is fair or not. This is true in particular because these prices normally depend on the size of assets, the strategy chosen and occasionally also on the frequency of advice given. Clients with little know-how thus risk paying too much for the service.
Fees charged for advise and wealth management services at least be disclosed to the client. Many providers, however, are burying other costs in the products they recommend to their clients. For instance, even experts are finding it hard to detect the margin applied to a structured product. After all, who is able to decide whether a particular option was fairly priced or not? The more complex a product is used, the bigger the asymmetry of information and the more options there are to add more margin.
«For many clients, it would be rather salutary to follow an annual media conference»
Thanks to the asymmetries of information, it is relatively easy for financial services firms to increase their margin at the expense of the client, both openly and covertly. What is the driving force behind this exploitation of their position of power?
The goal of profit maximization springs to mind first. If you aim for the biggest profit possible in a short period of time, the temptations are much stronger than for the provider with a long-term perspective. It would be salutary for many clients to join an annual press conference and hear the management proudly display how they managed to increase their client margin.
The compensation system deserves particular attention. Companies that promise to pay high bonuses to relationship managers for selling as many of the bank's own products as possible, clearly don’t have the best interest of clients as their focus. But even the compensation components that look innocuous at first sight can quickly turn problematic: a relationship manager whose bonus depends on the size of assets under custody won't likely tell his client to pay back a mortgage as it would lower his tally of assets under management.
«Most clients overestimate the complexity of changing their bank»
Clients who suspect that their relationship manager doesn’t act in their own best interest should demand to know how his compensation is being calculated. Ideally in writing to avoid becoming the victim of obfuscation.
In the past years, whenever there was a problem in financial services, the cry for the regulator wasn’t slow in coming. Is it possible to regulate away asymmetries of information? In part for sure: service providers could be forced to publish their prices on the internet or disclose product margins.
But discretionary powers for the latter of the two are so big that regulation would hardly help much. Competition is fully capable of solving the problem. The behavior of clients is decisive. They should care about issues involving their assets at least to a minimum degree. Nobody will benefit from a failure to act despite being dissatisfied.
Unfortunately, most clients overestimate the complexity of changing their bank and only a few know that most companies will assume the majority of costs incurred through a change of bank for new clients.
Matthias Hunn is the founder and CEO of FinGuide. The company supports private-banking clients in finding a wealth manager tailor-made for their needs. Hunn has 35 years of experience from working in the Swiss financial market. Before starting FinGuide, he was Migros Bank's head of products, prices, and marketing for ten years. He has a degree in business administration from the University of Zurich and has worked for Credit Suisse in various positions during and after his study years.
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