Private Bank Fees and Conflicts of Interest: Custody Fees, Management Fees, Spreads, Retrocessions and Disclosure Rules

Private bank fees and conflicts of interest are, respectively, the ways a bank earns income from a client's account and the situations in which that income may pull the bank's advice away from the client's interests. Private bank revenue falls into two categories. The first is fees the client pays directly and can see on the statement, such as custody fees, management fees, brokerage commissions and the margin added to loan interest. The second is benefits paid to the bank by product providers – fund houses, structured product issuers and counterparties – which the client usually does not see, such as fund retrocessions and dealing spreads.

The nature of the two revenue types and how regulators approach them

The two types of revenue differ in nature. With direct fees, the question is how much and how they are calculated; with benefits from product providers, the question is whether they influence recommendations. Regulation broadly follows the same line: Hong Kong requires benefits to be disclosed before or at the point of sale, while Singapore has remuneration disclosure rules for retail clients that may be waived for Accredited Investors. What the two jurisdictions have in common is that disclosure rules do not prohibit banks from receiving benefits from product providers; instead, they let clients know, before placing an order, from whom and how much the bank may receive, so that clients can judge whether a recommendation is affected. Hong Kong divides benefits into quantifiable and unquantifiable, and for the latter requires at least the maximum percentage to be disclosed. Most Singapore private banking clients are Accredited Investors, so some remuneration disclosure requirements can be waived and more depends on the agreement and the fee schedule themselves. This site does not quote any bank's fee ranges, because there is no publicly verifiable common basis; rates vary by bank, asset size and agreement.

Common fee types at a glance

A single investment can carry several layers of cost at once: buying a fund in a discretionary account means the client pays the management fee, the fund has its own management fee, and the bank may also receive a retrocession. Whether the agreement rebates retrocessions to the client or offsets them against the management fee needs to be checked clause by clause.

Hong Kong: how benefits from product providers are disclosed

When a Hong Kong private bank carries on securities business, it is also an SFC-registered institution and the SFC Code of Conduct applies. The provision most relevant to fees is paragraph 8.3:

• Quantifiable monetary benefits (paragraph 8.3(a)): to be disclosed before or at the point of sale as the Code requires.
• Unquantifiable monetary benefits (paragraph 8.3(b)(ii)): their existence and nature must be disclosed, together with the maximum percentage of monetary benefits receivable.
• Fund trailer fees: the SFC FAQ states that the minimum requirement is to disclose the maximum percentage receivable, fund by fund.

The SFC–HKMA circular of 29 October 2021 on the thematic review of spread charges goes further: intermediaries must disclose monetary and non-monetary benefits in writing before or at the point of sale, and merely referring clients to a standard fee schedule provided earlier is "not sufficient". Specific disclosure may take the form of a percentage ceiling of the investment amount, rounded up to the nearest whole percentage point, or the equivalent dollar amount. Two-way pricing arrangements must be agreed with the client in writing.

Paragraph 10.2 deals with the description "independent": an intermediary that is closely associated with a product issuer, or that receives benefits from product providers, may not describe itself as independent, and the SFC FAQ states that terms with a similar meaning such as impartial, neutral, objective and unbiased are not allowed either. When readers come across self-descriptions such as "independent" or "neutral", they can ask whether the firm receives benefits from product providers. This site does not state the specific effective dates of the relevant provisions.

Spreads and price improvement: key points of the 2021 thematic review

A spread is the difference between the dealing price the bank quotes to the client and the price the bank itself obtains, and is common in bonds, FX and OTC derivatives; price improvement is the difference that arises when the actual execution price is more favourable than the client's order price. In 2020/21, the SFC and HKMA concurrently reviewed intermediaries' spread charges and their disclosure of transaction information. The main points of the circular of 29 October 2021 are as follows:

The practical lesson for clients is that, for the same bond trade, whether the bank acts as agent or as principal directly determines who keeps the price improvement. Before placing an order, ask in what capacity the bank is acting in that trade and how the ceiling on the spread is disclosed.

Singapore: fair dealing, the code of conduct and the Accredited Investor exemptions

Fees and conflicts of interest at Singapore private banks are governed by three layers of rules:

1. MAS Guidelines on Fair Dealing (effective from 30 May 2024): these require the boards and senior management of financial institutions to take responsibility for fair dealing outcomes, and apply to all financial institutions.
2. The Private Banking Code of Conduct (issued by the Private Banking Advisory Group (PBAG) and published on the ABS website; the current version took effect on 1 September 2020): an industry self-regulatory code, under which private banking practitioners must pass the Client Advisor Competency Standards (CACS) assessment.
3. Disclosure requirements under the Financial Advisers Act: MAS Notice FAA-N03 (revised 5 October 2018) applies to licensed and exempt financial advisers and covers disclosure to clients of the financial adviser's remuneration and conflicts of interest; the accompanying Practice Note FAA-PN01 (revised 8 October 2018) gives guidance on when and how to disclose remuneration received for recommending or executing transactions in investment products.

The key point is the exemption for Accredited Investors under the third layer. Bank of Singapore's published Explanation of Effect of Being Treated as an Accredited Investor (Version 10/23) states that, when a client is treated as an Accredited Investor, the bank may be exempted from section 34 of the Financial Advisers Act (disclosure of all material information on recommended products) and the related requirements of FAA-N03 and FAA-PN01; it may be exempted from the requirement in section 36 to have a reasonable basis for recommendations and from Notice FAA-N16; and regulation 47DA of the Securities and Futures (Licensing and Conduct of Business) Regulations, which requires the bank to tell the client before a trade whether it is acting as principal or agent, likewise does not apply to Accredited Investors. In other words, how much remuneration disclosure a Singapore private banking client sees depends largely on the contract and the bank's own policies, not on a statutory format.

Typical conflict-of-interest situations

Five questions for reading a fee schedule

1. Are all fees listed? Itemise custody fees, management fees, brokerage commissions, FX spreads, and transfer-out and account closure fees, and confirm the minimum charges and the charging basis (market value, transaction amount or assets under mandate).
2. How are benefits from product providers treated? Do retrocessions go to the bank, get rebated to the client or offset the management fee, and what is the maximum percentage for each fund or product type?
3. In what capacity does the bank act in a trade? Principal or agent, who keeps the price improvement, and how is the spread disclosed?
4. Which disclosures has my client classification made optional? In Hong Kong, whether you are treated as a professional investor or a sophisticated professional investor; in Singapore, whether you have opted in as an Accredited Investor – and what each of these waives. See Private bank thresholds and services.
5. What is the total cost over a year? Ask the bank for the total of all fees and benefits based on your actual account over the past year, not just the rate card.

For a full pre-signing review, see A 15-point checklist before choosing a private bank. If you need this interpreted for your own circumstances, you can register your enquiry through the contact details on this site.