Between 40% and 50% of fees charged by private banks to manage family office portfolios are hidden from their sight, says GreenLock, a Swiss-based cost analysis service.
Unlike fees invoiced and paid by clients normally, hidden outgoings are charged as a cost to portfolios. As a result, family offices don’t think to lobby for greater efficiencies. GreenLock co-founder Danil Knyazev adds: “Clients have been getting ten-plus percent performance returns for years. So nobody asked any questions. Now the market’s changed, they need to rethink this.”
He argues every piece of strategic implementation needs to be monitored and challenged. GreenLock has studied thirty hidden fee points which can benefit from greater efficiency and savings.
Knyazev says one of his clients, a Swiss-based single-family office, saved 80 basis points a year after taking GreenLock’s advice, suggesting potential savings of $2.5 million over ten years: “It’s not like saving money on a grocery bill. Costs endure for years.”
Data provider Morningstar has argued that cost outcomes are the biggest driver of performance. In a recent survey of bond funds, ClearGlass, a UK cost analysis service, found managers with low costs tend to be top quartile, due to their efficiency.
According to Knyazev: “You can get new family offices wanting to be friends with their banks and getting charged 2.5% or 3%. You can slice their fees in half. If you are more experienced and professional, you could be paying 1.5%, but you can cut their fees by a quarter. I haven’t yet found a family office with zero potential opportunities.”
He adds: “You need to accept that clients have very little idea how much they pay, because hidden costs are scattered.” He has found there is little to differentiate the services offered by private banks as rival online services continue to raise their game.
Hidden costs in banking can include foreign exchange fees, mutual fund fees, brokerage, custody and private equity interest charges.
Clients can pay dear to access expensive fund classes, finance kickbacks or pay fees within a fee. The complex set up reminds Knayzev of a “Russian doll” with layer on layer of costs.
Knyazev’s team developed their service at a Swiss family office, which he declines to name. They have been running GreenLock for a year. Swiss family office adviser Simon Minder, founder of consultant M76, is a senior adviser, arguing that costs are a burden to family offices and need to be managed.
GreenLock has 15 clients, including a multi-family platform. Knyazev says he is increasingly keen to find business from multi-family and administrators who can offer bulk deals.
His plan is to stay in Switzerland for now, then add the UK and the Middle East. Knyazev says he was inspired by Norway’s sovereign fund which restricted its costs to 3 basis points after taking advantage of its scale.
Knyazev has little time for the conspiracy of silence within asset management over hidden fees. Technology is breaking down the walls, and he believes he is ready to challenge consensus in the sector after developing a career outside fund management, initially in oil and gas at Schlumberger. He later became a senior strategy manager at Accenture and went on to become a partner at blockchain advisory service BQIntel.
According to Knyazev: “We get access to quarterly statements and transaction lists. Then turn them into blocks of comparable data across their sectors.” The basic picture is put together over five days, then monitoring becomes more automatic.
GreenLock does not ask advisers to change their investment strategy. But he is baffled by how they are implemented, citing one firm that put 40% of client assets into a core strategy run by its managers. “Can you really trust someone who says so many of their managers are best in class?”
He seeks disclosure of kickbacks paid to managers by service providers, which remain common in Switzerland. He is unimpressed by managers’ determination to trade client money in Switzerland and pay stamp duty of 15 basis points on the transactions.
GreenLock also monitors private equity and venture capital strategies, including hidden costs. It has been found that funds can only offer clients a minority of returns achieved after profit-sharing arrangements and expenses. The dispersion of performance returns varies widely.
Clients may be inclined to use the data themselves when they have received their data on costs, plus quarterly monitoring agreements, paying GreenLock a flat fee of $50,000 to$20,000 a year.
Many, however, ask GreenLock to negotiate a better deal for a fee of between 5% to 10% of eventual savings.
Negotiations require subtlety: “We could say that we are paying a bank $20,000 and only want $5,000. At which point, the bank may want to wave goodbye. But we’ve been through this exercise a dozen times. We know our limits.”
GreenLock knows that its client may be reluctant to lose a good relationship. But when presented with evidence of unfair charging, banks can be willing to strike a deal even if they can resist backdating a settlement by more than two years. Which still leaves leeway to cut costs by between 50 and 200 basis points.
It pushes against deals where banks want to charge 50 basis points where clients are based in regions like Eastern Europe and Latin America. “You can understand background checks on a reserve currency, but it shouldn’t lead to payments for life.”
GreenLock also suggests how strategies can be implemented more cheaply. It often points out that clients are accessing an expensive share class for a fund, even if they have the scale to invest through clean, cheap, institutional access.
The cost dispersion between banks in custody, broking and advisory services are 30 basis points, or more, according to client data put together by GreenLock. Dispersion in foreign exchange can be 10 basis points.
Fee discounts, or changes in practice, including innovative trading solutions, can also produce economies. This could involve negotiating currency commissions across entire portfolios, rather than sticking to deals based on trading volumes for different times and places.