moneyFrom 2 Sep, Citigold clients can opt for a wrap-fee based service, which reduces the front-end transactional cost to better align client/adviser interests. This is offered to those with $1 million to US$10m of investments under management. Instead of the front-end sales charges or commissions, they will be billed annual fees on the portfolio under management (including structured notes, bonds and unit trusts).  A significant change of trend perhaps?

According to the article the first $500,000 will incur annual fees of 1.5%, and go as low as 0.75% for bigger portfolios.

While Citi-bank may be the first bank to offer such a service typically reserved for the ultra-high net worth private bank clients, Financial Advisory (FA) firms offering independent have already been at it since 2003 for the mass affluent.

As a hybrid model, FA firms charge a lower front-end fee (typically from 3%) and an annual wrap fee (from 1%) similar to what Citi-Gold is offering. Most firms also have a scale such that for larger amounts under management, the front-end fees as well as the wrap fees, will be gradually reduced. Most FA firms will handle these “Wrap” accounts for amounts $30,000 onwards. Within the basket of investments, all switches from one fund to the other are free of transaction charges, thus clients need not worry about incurring large transaction costs, and if the adviser is making money from “churning” the account.

Citibank’s move, will put some pressure on the early high net worth market on other banks and FA firms serving this market. While the move is clearly advantageous to clients, a clearer insight into how it works exactly before a client should commit.

For example:

Some investment  products should not be part of the annual fee arrangement. Transactional products like structured products have in-built fees, and require little management once implemented. Straight bonds also have little management involved, and when 1.5% is taken away from a low yield fo 2-4%, it does not make much sense.

Clients should understand what constitutes the annual fees before entering into such an arrangement.

While the inherent issue of “churning” the account can be reduced with this arrangement, consumers should also bear in mind other aspects of potential conflict of interest: the financial institution’s own products, compensation arrangements with product providers and biases due to limted suite of products.



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