How to Evaluate Your Private Bank's Investment Performance

One of the most persistent myths in private banking is that paying more for discretionary management means receiving better returns. The evidence does not generally support this. Academic research, industry data, and independent benchmarking consistently show that active management — including most private bank discretionary investment management — underperforms simple passive alternatives after costs over the long term.

This does not mean private bank investment management is always inappropriate. For clients with complex requirements, illiquid assets, multiple jurisdictions, and family governance needs, a discretionary manager provides services that a passive index fund cannot. But for clients who are paying 1.5-2% per annum in total costs and not receiving commensurate value, the evidence base for reconsidering is strong.

This guide explains how to evaluate your private bank's investment performance rigorously — including total cost of ownership, appropriate benchmarks, risk-adjusted returns, and the process for switching.

Why Evaluation Is Difficult

Private bank performance reporting is frequently designed for reassurance rather than rigorous evaluation. Common problems:

No consistent benchmark: the quarterly report may show your portfolio returned 6.2% last year. Without a benchmark — a realistic alternative you could have invested in for much less cost — this number is meaningless. A global equity index returned 12% in the same period. Now the 6.2% looks very different.

Composite reporting: some private banks aggregate all client portfolios in the same risk category into a composite return. This can obscure the specific performance of your portfolio — particularly if your portfolio has different characteristics (legacy holdings, tax restrictions, concentration in specific assets) from the average.

Fees buried in presentation: the reported return may be before or after some fees but not others. Custody fees, underlying fund charges, transaction costs, and advisory fees may all be presented differently or combined in non-transparent ways.

Risk is ignored: a portfolio that returned 10% by taking significantly more risk than a benchmark is not outperforming — it is returning appropriately for the risk taken, and may be underperforming on a risk-adjusted basis.

Establishing Total Cost of Ownership

The first step is determining what you actually pay. Request a complete cost breakdown:

Custody/administration fee: charged for holding assets. Typically 0.1-0.3% per annum of assets under custody, banded (higher percentage at lower asset levels).

Discretionary management fee (if applicable): charged for actively managing the portfolio. Typically 0.5-0.75% per annum for a discretionary mandate.

Advisory fee (if applicable): charged for an advisory relationship where you approve each trade.

Underlying fund charges: if your portfolio holds actively managed funds (unit trusts, OEICs, SICAVs), each fund has its own ongoing charge (OCF or TER — typically 0.6-1.5% for active funds; 0.07-0.25% for passive index funds). These charges are not always separately visible in the portfolio reporting.

Transaction costs: dealing commissions or spreads on buying and selling securities.

A typical private bank discretionary portfolio in a "balanced" (60% equity/40% bond) allocation might have:

• Custody: 0.20%
• Discretionary management: 0.65%
• Underlying funds (largely active): 0.75%
• Transaction costs: 0.10%
• Total: approximately 1.70% per annum

Against this, a DIY passive equivalent (60% global equity index fund + 40% global bond index fund, via a low-cost platform) might cost:

• Platform/custody: 0.20-0.35% (banded)
• Underlying funds: 0.12-0.20%
• Total: approximately 0.32-0.55% per annum

The difference is approximately 1.2-1.4% per annum. Over 20 years, on a £2m portfolio, this represents approximately £500,000-£700,000 in additional cost — before considering whether the active management added any return.

The private bank manager needs to outperform by more than the cost difference consistently over time to justify the fee. The evidence that this occurs reliably is weak.

Appropriate Benchmarks

The choice of benchmark is critical. Private banks often set themselves up against weak benchmarks — proprietary benchmarks, absolute return targets, or mixed-asset composites that are not easily replicated — that make outperformance look easier to achieve.

ARC (Asset Risk Consultants) Private Client Indices: the most widely used independent benchmark for private client portfolios in the UK. ARC calculates composite returns for portfolios in different risk categories (Cautious, Balanced Asset, Steady Growth, Equity Risk) based on actual returns reported by a large panel of private banks and wealth managers.

Your private bank's performance should be assessed against the ARC index for the appropriate risk category, net of all fees. If your manager is in the lower half of the ARC distribution consistently, this is a meaningful signal.

Simple passive benchmark: construct a realistic passive alternative — say, 60% MSCI All Country World Index, 40% Bloomberg Global Aggregate Bond Index, in the appropriate currency, minus the passive costs. This is a more demanding benchmark but reflects what you could have earned with a simple low-cost alternative.

Inflation + X%: some private bank mandates are set against an "inflation + 3%" or "inflation + 4%" absolute return target. This can be appropriate for clients where capital preservation against inflation is the primary objective, but it can also be a low bar if set at levels that passive investing typically exceeds.

Risk-Adjusted Performance

Comparing absolute returns without considering risk is incomplete. A portfolio that returned 10% by being 100% in equities during a bull market has not outperformed a mandate that returned 8% with significantly lower volatility, if the mandate's risk guidelines permitted only moderate equity exposure.

Sharpe ratio: (portfolio return minus risk-free rate) divided by portfolio volatility. A higher Sharpe ratio means better return per unit of risk. Ask your private bank for the Sharpe ratio of your portfolio over 3 and 5 years, alongside the same metric for the relevant benchmark.

Drawdown: the maximum peak-to-trough decline in portfolio value over the measurement period. A private bank that limits drawdown materially relative to the benchmark may be providing genuine risk management value even if gross returns are similar.

The Switching Decision

If your evaluation concludes that your current discretionary manager is not delivering value commensurate with costs, switching is less daunting than most clients expect:

What to collect before leaving: full transaction history for at least three years (for CGT and tax reporting). Statements of all holdings. Cost basis records for all assets. Any structured products (note maturities — you may need to hold or arrange exit separately). Performance reports.

In-specie transfer: where possible, transfer assets in-specie (moving the actual holdings rather than selling and transferring cash). This avoids triggering capital gains on an entire portfolio. Not all receiving firms will take all assets in-specie (particularly alternative investments, structured products, and proprietary funds).

CGT on exit: if you sell before transferring, you crystallise any capital gains. This may or may not be a significant factor depending on your portfolio's embedded gains and your CGT position. For portfolios with large unrealised gains, an in-specie transfer to a new manager is strongly preferable.

Regulatory right to switch: you do not need to give notice beyond your contractual period (typically 30-60 days). The private bank cannot hold assets against your wishes once the relationship is terminated and transfer instructions are given. They may not be cooperative, but they are legally required to transfer your assets.

Finding a new manager: independent financial advisers (IFAs) who are also discretionary investment managers, multi-family offices, specialist investment platforms, and lower-cost passive solutions are all alternatives. The right choice depends on whether you genuinely need active management, the complexity of your portfolio, and your preference for advisory involvement.

When Private Bank Discretionary Management Is Justified

Private bank DIM remains appropriate when:

• Complexity: the portfolio includes illiquid alternatives, direct lending, real assets, or multi-currency structured products that genuinely require active management
• Governance: families who want a professional third party to make investment decisions without their involvement — removing emotional decision-making and family conflict from the process
• Integration: tax planning, estate planning, and investment management are genuinely integrated in ways that add value beyond investment returns alone
• Alternative threshold: the comparable passive alternative is not meaningfully cheaper when all services are priced properly
• Specific mandates: the manager has a demonstrable track record of alpha generation in a specific asset class where passive alternatives are limited (private credit, niche alternatives)

The key is that the decision should be based on evidence rather than inertia or the bank's persuasion.

How Global Investments Can Help

Global Investments works with HNW clients who want an independent perspective on their current banking and investment management arrangements. We can help you reconstruct total cost of ownership, select and apply appropriate benchmarks, and evaluate whether your private bank is delivering value commensurate with what you pay.

If the conclusion is that your current arrangements can be improved — whether by switching manager, reducing costs, adjusting the mandate, or restructuring the relationship — we can help you navigate the transition and identify alternatives appropriate to your specific requirements. Contact us to arrange a confidential review of your investment management arrangements.