“One of the core differences between how IAMs and private banks operate is the way fees are charged,” says Moraitis. “This arises from the fact that we work for our clients, whereas RMs work for the bank.”
In practice, this means that clients pay IAMs an ongoing advisory or management fee – whereas private banks usually operate on a transactional model, with each trade earning the bank a fee.
This means more transactions would result in more revenue, which leads to a natural conflict of interest because the bank is motivated to ensure more frequent trading as this increases revenue and profitability. This can often lead to clients being encouraged to trade more frequently than is in their best interests.
While many investors in Asia understand the commercial dynamics of the transactional nature of their banking relationship, they are often under the illusion that they are not paying a fee for anything else.
“There is no such thing as a free lunch,” Moraitis says. “By the time one adds the fees charged for each transaction – the upfront and ongoing management fees charged by the mutual funds, the distribution cost for insurance products, and the embedded fees hidden within structured products – the total fees can be far higher than what one would pay an IAM.”
Learn more about what IAMs such as Crossinvest can do for you.