Multi-Family Office: Independence and Transparency = No Conflict of Interest (part 3)
In our previous articles (Multi-Family Office: A New Paradigm of Trust for Investors (Part 1)) and (Multi-Family Office; A Human Touch with Responsiveness and Cohesion (Part 2)), we discussed how OMF has emerged as the true provider of trust by demonstrating its professionalism and credibility. In addition, we mentioned how a distinctive feature of a well-managed multifamily office is that it is a highly humane service oriented not only to a rapid solution to problems, but also capable of anticipating them and having possible solutions available with a coherent strategy.
Additionally, the integrity of the consultancy, as a constant source of sophisticated advice that guides the family or the client in all aspects of their affairs, is based on the notion of independence and transparency where the interest must be common and the incentives must be aligned with those of the clients. Fundamentally, building credibility is about being open, transparent and accessible.
The relationship between an investor and a financial service provider can be resumed as a two-way street. Both parties share responsibilities for ensuring disclosure and transparency in the relationship. But all too often, a client’s perceptive view is just the opposite, that only the bank makes money. In fact, customers are increasingly dissatisfied with banks because of the opacity of bank fees and charges. I often joke that if you asked how much your bank billed you in total fees and charges for a year, you wouldn’t get a straight answer. Very often, the bank will respond by saying that complex IT systems are not designed to provide this kind of clarity to customers.
This lack of information often results in customer inertia. Customer inertia refers to circumstances where customers are locked into their existing banks or financial providers because it is not easy for them to change their accounts or obtain new services from new financial advisors. To reduce this inertia and lack of information, it is essential that clients have full disclosure and understanding of all charges that apply to their accounts. Therefore, advisors who have undisclosed conflicts of interest should be cautioned against.
True transparency in product fees, pricing and services is critical to building client trust, because trust is the key element of client satisfaction and the cornerstone of a good and fair relationship.
This is why the interest must be common and aligned between investors and financial service providers, otherwise the game is fixed in advance.
The Multi-Family office typically charges a fee based on a percentage of the assets under management. This fee structure is simple, transparent and easy to understand. It also gives your advisor an incentive to help increase your assets. When you succeed, your advisor succeeds.
When it comes to trading activity, too many clients give up on buying a stock or bond because of the cost of the transaction and sometimes you can hear the phrase: how much will it cost?
The reason for this reaction is that transaction costs are somewhat prohibitive, expensive and not always clear.
In fact, another inherent conflict of interest that leads to a higher cost for the client is when a bank trading floor or a broker makes recommendations, but mainly implements the investor’s instructions and is compensated through trading fees. The more activity in the account, the greater the compensation from the bank or broker.
A higher cost can also arise when a broker or a bank trading floor does not disclose the relevant offer or spreads to a client on bond purchases, for example. Because bonds are more complicated and less transparent than stocks, brokers can make huge profits at the expense of investors. Most of the time, the trader will offer his client the price at which he is prepared to complete the transaction at that time with excessive margin.
In this case, the quoted margin does not represent the effective margin (usually 1%) and a mark-up is applied to exploit retail investors’ unfamiliarity with bonds. This practice of hidden fees is all too common in the bond market.
Having a thorough understanding of these market elements is an essential consideration in an investment decision. But more important than just knowledge, having an independent advisor to help you make your decision is essential.
A higher cost can also arise when a broker or a banking floor does not disclose the relevant offer or spreads to a customer on bond purchases, for example. Because bonds are more complicated and less transparent than stocks, brokers can make huge profits at the expense of investors. Most of the time, the trader will offer his client the price at which he is prepared to complete the transaction at that time with excessive margin.
In this case, the quoted margin does not represent the effective margin (usually 1%) and a mark-up is applied to exploit retail investors’ unfamiliarity with bonds. This practice of hidden fees is all too common in the bond market.
Having a thorough understanding of these market elements is an essential consideration in an investment decision. But more important than knowledge alone, having an independent advisor review these transactions with knowledge of all market elements is the best guarantee of paying less and getting a higher return.
Another frequent complaint from investors is that their relationship manager (RM) at the bank keeps changing, often to be replaced by another. This leaves clients in a situation where they are dealing with a relationship manager who is not familiar with their investment strategies or who is simply trying to promote products that clients do not want or understand. One of the main differences between the way private banks operate and OMF is the way fees are charged; the fact is that OMF works for the clients, while the relationship manager works for the bank.
OMF charges an annual administration fee, so the only motivation to suggest a solution is to improve performance and safeguard the interests of its clients and to target the best investment options with the lowest fees. Whether they operate on a discretionary or advisory basis, the fee remains the same: it does not increase with the frequency of transactions, so it does not encourage unnecessary transactions. If you are dealing with advisors working on a fee basis and paying a management fee, you are in good hands.
As an independent OMF, one of our key objectives is to keep all external fees paid by clients to an absolute minimum and to focus on a medium- to long-term portfolio approach for those clients. Our clients know where they stand with us, they know that we are actively negotiating the lowest rate for them, they know our advisory rate and therefore there are no surprises.
Regardless of their background, source of wealth or family dynamics, managing significant wealth presents a wide range of unique opportunities and challenges.
With financial success comes the complexity of managing more assets for business owners and families, and more of them want to regain control in actively managing their affairs with a thorough understanding and trusted professionals who demonstrate transparency, independence and integrity. For large families, it is difficult to imagine a successful outcome without the best specialized advisors and a coordinator or family office.
Because families want to ensure that their assets do not deteriorate and know how to invest better, they want to move away from traditional banking platforms of investment and wealth management.
To achieve these goals, investors must rely on a trusted advisor who performs with complete fairness. In this quest, independent MMOs are a natural choice for clients because they represent a true competitive differentiator.
Maxime Berthet
CEO & Founding partner
To learn more, contact us at:
info@kb-familyoffice.com
November, 2019
