Private Banks vs Broker-Dealers vs Digital Advisors
Abstract
In the dynamic landscape of financial services, Private Banks, Broker-Dealers, and Digital Advisors emerge as key players catering to diverse needs. This blog scrutinizes the distinctive features of each, shedding light on why you might need their services. We explore their operational mechanisms, compare the amplitude of services, delve into figures like the typical Relationship Manager to Asset Under Management ratio, analyze their market share in the US, discuss cost differentials, and pose the pivotal question – is it worth dealing with one of them?
Time to Read: Approximately 3 to 5 minutes.
Level: Fundamental.
Category: Education Note.
Understanding the distinctive offerings of Private Banks, Broker-Dealers, and Digital Advisors is essential for aligning financial decisions with individual needs. Private Banks stand out for their emphasis on high-touch, personalized wealth management services, specifically tailored for affluent and ultra-high-net-worth clients. Dedicated Relationship Managers curate bespoke financial solutions, providing strategic insights aligned with clients' specific goals. Private Banks excel in granting exclusive access to investment opportunities, estate planning, and a suite of financial services that extend beyond traditional banking, reflecting a commitment to comprehensive and tailored financial stewardship.
In contrast, Broker-Dealers play a crucial role as intermediaries facilitating the buying and selling of securities while offering advisory services for a fee. Suited for those who prefer a hands-on approach to investments, Broker-Dealers offer a broad range of financial products, executing trades on behalf of clients. Their services are valued by those actively managing portfolios, providing a blend of professional guidance and client autonomy. With a higher market share than Private Banks, Broker-Dealers contribute significantly to the industry's revenue pools, reflecting growth in client assets driven by market recovery and the shift to fee-based accounts.
Digital Advisors epitomize a technologically-driven approach to wealth management, utilizing algorithms and automation to provide cost-effective investment advice. Ideal for individuals seeking a streamlined investment strategy, Digital Advisors offer efficient and diversified portfolios without constant human intervention. These platforms, often leveraging robo-advisors, analyze market trends, manage asset allocations, and rebalance portfolios. Boasting the highest market share and growth rate among the three, Digital Advisors underscore the scalability and efficiency of the digital advisory model, appealing to investors across various segments.
How AUM per Advisor Reflects the Value and Efficiency of Different Financial Institutions
The relationship between a financial advisor or a relationship manager and the assets under management (AUM) of different types of financial institutions is an important indicator of the value proposition and the efficiency of the advisory model.
Private banks are known for providing high-touch, personalized, and comprehensive wealth management services to affluent and ultra-high-net-worth clients. According to a report by Scorpio Partnership, the average AUM per advisor of the top 25 global private banks was $594 million in 2020, up from $562 million in 2019. Private banks have the lowest market share among the three types, with only 1 percent of the US wealth management industry’s revenue pools in 2020.
Broker-dealers are intermediaries that facilitate the buying and selling of securities for clients, and may also offer advisory services for a fee. According to a report by Cerulli Associates, the average AUM per advisor of the top 10 U.S. broker-dealers was $164 million in 2020, up from $150 million in 2019. Broker-dealers have a higher market share, with 19 percent of the industry’s revenue pools in 2020. This reflects the growth in client assets driven by the market recovery and the shift to fee-based accounts.
Digital advisors are online platforms that use algorithms and automation to provide investment advice and portfolio management to clients, often at a lower cost than traditional advisors. According to a report by Backend Benchmarking, the average AUM per advisor of the top 10 U.S. digital advisors was $4.3 billion in 2020, up from $3.4 billion in 2019. Digital advisors have the highest market share and growth rate among the three types, with 25 percent of the industry’s revenue pools in 2020 and more than 20 percent annual revenue growth since 2016. This reflects the scalability and efficiency of the digital advisory model, as well as the increased adoption of digital solutions by investors of all segments.
As we can see, the AUM per advisor of different types of financial institutions varies significantly, depending on the target market, the service offering, the cost structure, and the technology adoption. This suggests that there is no one-size-fits-all approach to financial advice, and that different models can coexist and complement each other in the evolving wealth management landscape.
How to Choose the Best Wealth Management Service for Your Needs
Cost considerations are another important factor to compare the different types of financial institutions that offer wealth management services. Private banks, broker-dealers, and digital advisors have different fee structures, commission rates, and hidden costs that affect their value proposition and profitability. According to various sources, the cost structures of these institutions are as follows:
Private banks typically charge their clients a management fee based on a percentage of assets under management (AUM), which can range from 0.5% to 2% or more, depending on the size and complexity of the client's portfolio. Private banks may also charge additional fees for specific services, such as trust administration, estate planning, or tax advice. Private banks do not rely on commissions from product sales, as they are expected to provide unbiased and holistic advice to their clients.
Broker-dealers may charge their clients a commission on the sale of mutual funds and other financial products, a management fee based on a percentage of AUM, or both. The commission rates vary depending on the type and size of the transaction, and may be subject to negotiation or discount. The management fees are usually lower than those of private banks, as they reflect a less comprehensive and personalized service offering. Broker-dealers may also incur hidden costs, such as markups on outside money managers, errors and omissions insurance, and fees for holding assets in brokerage accounts.
Digital advisors are online platforms that use algorithms and automation to provide investment advice and portfolio management to clients, often at a lower cost than traditional advisors. Digital advisors typically charge their clients a flat or tiered management fee based on a percentage of AUM, which can range from 0% to 0.5% or more, depending on the level of service and human interaction. Digital advisors do not charge commissions or hidden fees, as they use low-cost exchange-traded funds (ETFs) and index funds to build diversified portfolios for their clients.
The AUM per relationship manager of the private bank, broker dealer, and digital advisor reflects the different value propositions and cost structures of these types of financial institutions. Private banks offer the most personalized and comprehensive wealth management services, but also charge the highest fees. Broker-dealers offer a mix of transactional and advisory services, but may also incur commissions and hidden costs. Digital advisors offer the most scalable and efficient investment advice, but may lack human interaction and customization.
In summary, the selection of the right financial institution involves careful consideration of individual financial needs, cost sensitivity, and risk tolerance. The investor should evaluate the services of each institution, aligning them with specific requirements, and also consider the time commitment required for managing various platforms against the derived benefits. Moreover, it is crucial for the investor to feel comfortable with the financial advisor or touch service point, recognizing the importance of proper development as an investor and effective financial management. It is advisable for the investor to choose an institution that caters not only to immediate needs but also aligns with long-term financial goals. Diversifying among institutions can further enhance the investor's experience, promoting trust and satisfaction in their financial journey.
References:
Sironi, Paolo. FinTech Innovation: From Robo-Advisors to Goal Based Investing and Gamification. 1st ed. The Wiley Finance Series. Hoboken, NJ: John Wiley & Sons, 2016.
Sironi, Paolo. Banks and Fintech on Platform Economies: Contextual and Conscious Banking. 1st ed. The Wiley Finance Series. Hoboken, NJ: John Wiley & Sons, 2021.
King, Brett. Bank 4.0: Banking Everywhere, Never at a Bank. 1st ed. Hoboken, NJ: John Wiley & Sons, 2018.
