Wealth Management: seven questions to ask an advisor

Thursday, 21 November 2024

Monde Economique

By Achille Deodato, CEO of Indigita SA

Private banks and wealth management firms often describe their services with terms such as “Private Banking,” “Wealth Planning,” or “Investment Solutions.” While these labels can be appealing, they often leave clients unclear about the exact scope of services provided or the associated costs. This lack of clarity highlights the importance of understanding the key aspects of wealth management and ensuring that it aligns with the client’s financial objectives. Asking the right questions is the first step toward making informed decisions. 

Asset security

Asset security is a cornerstone of wealth management. When a client entrusts their assets to an institution, it is essential to understand how different types of assets—whether held or invested— will be safeguarded.

For tangible assets like precious metals, it is important to confirm whether they are held off-balance sheet by the bank. Assets held on the bank’s balance sheet are exposed to the institution’s financial risks, including insolvency. Similarly, digital assets such as cryptocurrencies or tokens raise specific concerns: are they secured in independent structures, or are they integrated into the bank’s assets? Even cash, often perceived as a safe asset, requires careful consideration. In the event of a financial crisis or the bank’s bankruptcy, these funds could be at risk unless protected by mechanisms like deposit insurance or held in segregated accounts off the bank’s balance sheet. This scrutiny should extend to more complex investments, such as mutual funds or structured products, which may carry hidden risks tied to their nature or custody arrangements.

Clients must ask precise questions about how the bank handles and secures various types of assets. This ensures that the proposed investments align with their expectations for asset protection.

Regulatory framework

Understanding the regulatory framework under which a bank operates is equally important, as it directly impacts the level of protection available to investors. For example, European clients might favor Swiss banks that comply with MiFID II regulations, which impose stringent requirements for transparency, conflict-of-interest management, and investor protection. MiFID II also provides clients with easier access to legal recourse within the European Union. In contrast, some Swiss banks adhere only to the Swiss Financial Services Act (FinSA), which, while significant, offers a different and sometimes less comprehensive level of protection.

Banks that are part of international groups often benefit from dual regulatory oversight: one by Swiss authorities and another by the home country of the parent group. This dual supervision can enhance institutional stability and ensure higher standards in risk management and transparency.

Another important factor is whether the bank is publicly listed. Listed banks are required to meet strict financial disclosure obligations, which provide greater transparency about their financial health, solvency ratios, and governance practices. Additionally, public scrutiny from markets and shareholders tends to curb risky behavior, particularly in proprietary investments or client fund management.

Clients should also investigate whether the bank has faced disciplinary actions or regulatory inquiries. Institutions with a history of sanctions or questionable practices may indicate weaknesses in governance or internal controls. 

Understanding these regulatory and structural aspects helps clients choose institutions not only based on reputation or services but also on the solidity of their regulatory framework and the security they provide.

In-house products and transparency

Many private banks develop and offer their own financial products, such as mutual funds, structured investments, or derivatives. While these products can meet specific needs, they also pose potential conflicts of interest. A bank that creates its own products may prioritize promoting them over external alternatives, which might be more advantageous or better suited to the client’s needs.

It is therefore essential to ensure that the bank is transparent about the role of in-house products in its offering. Clients should inquire about the criteria driving investment recommendations: are they genuinely based on the client’s needs and risk profile, or are they influenced by the bank’s commercial objectives to maximize revenue?

The quality of investment recommendations also depends on the bank’s research capabilities. A strong research team, staffed by experienced analysts, can identify relevant investment opportunities and anticipate economic or market trends. Understanding the expertise and resources allocated to this team is key to evaluating the reliability of the bank’s advice.

By asking these questions, clients can better assess the impartiality of the bank’s proposals and ensure that their interests come first.

Tax suitability

The tax implications of investments are often overlooked, yet they can significantly impact net returns and long-term wealth objectives. Effective wealth management must include a thorough analysis of the tax suitability of proposed investments. Different jurisdictions impose varying tax treatments, and what may be advantageous in one country could be highly inefficient in another.

Tax suitability means ensuring that the bank’s recommended products align with the client’s tax obligations while minimizing inefficiencies. For instance, some investments may incur heavy taxes in one jurisdiction but benefit from favorable treatment in another. A competent wealth manager should identify these differences and tailor recommendations to optimize the client’s tax position, particularly for those with international wealth or complex tax residency.

In Switzerland, FINMA has mandated that banks consider tax risks as part of their responsibilities. This includes evaluating the tax impact of their investment advice and avoiding products that may be detrimental from a tax perspective. For example, a product generating highly taxable income may not be suitable for a client in a high-tax jurisdiction, even if it appears attractive in terms of gross returns.

While banks are not typically authorized to provide detailed tax advice, they should ensure that their recommendations consider the client’s general tax obligations and collaborate with external tax or legal advisors when necessary. 

Estate and succession planning

Wealth management extends beyond investment strategies to include preparing for the future. Estate and succession planning are vital components, particularly for clients with international complexities in their assets or family structures.

The transfer of wealth requires careful planning to ensure a smooth transition that aligns with the client’s wishes while minimizing tax liabilities and avoiding family disputes. Private banks can play a key role by recommending tailored solutions, such as life insurance products, dedicated funds, or specific legal structures (e.g., trusts or foundations). These vehicles not only optimize the fiscal aspect of wealth transfer but also ensure that assets are distributed according to the client’s intentions.

Beyond the financial dimension, estate planning often involves preparing heirs to manage inherited wealth or establishing mechanisms to ensure the longevity of family businesses or specific assets. Proactive banks may offer educational resources for heirs or facilitate intergenerational discussions about wealth management goals and responsibilities.

Understanding the fees

Fees are one of the most tangible yet misunderstood aspects of wealth management. Clients must obtain a clear breakdown of all costs, including management fees, transaction fees, and any hidden charges within specific products like mutual funds. Over time, even modest fees can erode returns, making it crucial to fully understand their financial impact.

Some banks charge performance-based fees, which align the bank’s interests with those of the client. However, these require careful scrutiny to ensure they are fair and transparent. Clients should request detailed explanations of all costs associated with their portfolio.

Relationship with the advisor

The personal relationship between a client and their advisor is a cornerstone of effective wealth management. Trust is built over time through consistent and transparent interactions. The advisor’s professional background offers valuable insights into their reliability and expertise. For instance, an advisor who has been with the same institution for several years often demonstrates stability and a deep understanding of the bank’s culture and processes. Conversely, frequent changes of employer may raise questions about their ability to provide consistent, long-term guidance.

An advisor must not only possess technical expertise but also thoroughly understand the client’s financial goals, risk tolerance, and personal circumstances. This ensures that wealth management strategies are tailored not just to financial criteria but also to the client’s broader personal and professional ambitions.

Conclusion

Wealth management is much more than a set of financial services; it is a comprehensive strategy built on security, transparency, and personalized planning. By seeking clarity on these seven essential questions, clients can better understand the solutions offered, evaluate their relevance, and ensure they align with their long-term objectives. A well-informed approach is key to building and preserving wealth for the future.