“Free” investing: the economics of private banking

Investing is never free. Yes, even “free” investing through a bank, brokerage firm, or asset manager. Usually, nobody sends you a separate invoice – the fees are simply embedded inside neatly packaged products with a personal manager, lifestyle services, privileges, and the overall feeling that your capital is being handled in a VIP format.

This is convenient and, at times, genuinely justified. However, the investment value of such solutions is not always obvious, while total costs often exceed the price of working with an independent advisor. Over long periods, the difference may amount to hundreds of thousands of dollars – and for larger portfolios, millions.

This article is not an argument of “bank versus advisor.” The goal is different: to calmly understand who earns money from what, where unnecessary fees arise, and how much wealth management actually costs.

Why fees matter more than they seem

The difference between annual costs of 1.3% and 3.5% does not look dramatic at first glance. But over long periods, it turns into substantial sums. Over 20 years, a $1 million portfolio earning a hypothetical 8% annual return with total costs of 1.3% per year would grow to roughly $3.66 million. With costs of 3.5% annually, only to about $2.41 million. The difference – around $1.25 million – comes from fees alone.

Fees are an important part of investment results.

What you are actually paying for

Investment expenses for affluent investors typically come down to the following:

• private banking and premium banking packages
• mutual funds and discretionary management
• structured notes
• IPO and pre-IPO participation
• real estate transactions
• brokerage services for self-directed investing

Costs have always existed and always will. The real question is whether they are transparent. Can they be managed? And do your interests align with those of the intermediaries?

Banks and private banking: convenience at your expense

Concierge services, airport lounges, insurance, assistance with day-to-day matters, and turnkey investment solutions. All of this can indeed be useful. But it helps to separate the offering into three categories:

• insurance
• investments
• lifestyle

A broad package creates the impression that you are receiving a great deal “for free.” Everything included. But such things do not exist. The cost is simply spread across the structure. Insurance and investment solutions are provided by affiliated companies – and not always on terms that are best for you.

Take bundled critical illness insurance as an example. On paper, it looks convincing. You get the impression that you are “insured against everything” and have solved the issue once and for all. In practice, however, when an actual claim occurs, it often turns out that “this isn’t covered, that isn’t covered”:

• some diagnoses are excluded
• payout limits do not correspond to actual treatment costs
• expensive medications and treatment at the desired clinic are not covered
• and many options come with exclusions and limitations

The last thing anyone wants to think about after receiving a serious diagnosis.

A standalone critical illness policy is a real instrument, not a “checkbox” inside a service package. Yes, it costs more and is paid for separately. But in return, you receive a completely different level of protection:

• a broader list of covered illnesses
• coverage for modern treatment and medication without symbolic limits
• access to leading clinics around the world
• and full-service support

Hopefully, you will never need it. But if you do, the only question becomes: “Which clinic should I choose?” – not “Where do I find the money?” and “How do I organize all of this?”

Investments provide another typical example. A bank offers a discretionary management strategy run by an affiliated asset management company. Inside the strategy sit mutual funds managed by the same firm. The result is a double layer of fees: one for discretionary management and another for the fund itself. The Central Bank of Russia officially classifies this as an unfair practice under the category of “non-transparent pricing.”

Mutual funds and discretionary management

For a busy person, the ability to hand over a portfolio to a professional manager and stop thinking about it has real value. The simplest way to do this is through a mutual fund – open-end, closed-end, or interval. You purchase fund units and transfer all operational work to the management company.

As of May 2026, according to data from Investfunds, average annual costs across a sample of 142 Russian equity mutual funds with more than 100 investors amount to 4.1% per year. For 76 bond funds, fees are predictably lower – around 2.9%.

The next level of delegation is discretionary portfolio management. Unlike mutual funds, this allows for the implementation of an individual investment strategy – at least in theory. Fixed discretionary management fees in Russia range between 1–2% annually based on assets under management. In addition, there is usually a performance fee of 10–20% of profits. Combined with other costs, the total burden can easily reach 2.5–3% per year or more.

Paradoxically, “collective” mutual funds may end up being more expensive than “individual” discretionary management: 2.9–4.1% versus 2.5–3% annually. The reason is likely that affluent clients, unlike mass-market investors, approach financial products more carefully and ask more questions. Even so, discretionary management fees remain high enough to materially affect long-term returns.

To be fair, every mutual fund or discretionary strategy sits on top of a whole infrastructure: custodian, registrar, auditor, appraiser – each receiving compensation. Proper organization costs money. And not all of it goes to the management company.

Nevertheless, for a $1 million portfolio, such costs amount to roughly $25,000–$41,000 annually. And nobody sends you an invoice.

“But what about exchange-traded funds?” you might ask. “Why not simply buy them?” Indeed, ETFs cost investors less: in Russia, roughly 1.5% annually for equity funds and 1.0% for bond funds. Abroad, fees are even lower. And yes, if all your needs come down to buying a couple of funds, there is genuinely no need to hire anyone. Perhaps only for a one-time consultation with an investment advisor or an educational course.

The advisor’s role is broader – not to select a “super fund,” but to help the investor:

• align portfolio structure with goals and investment horizon
• limit exposure to expensive and complex products
• build tax and currency logic
• coordinate investments with business interests and personal liabilities
• and, in some cases, identify assets whose potential the market has not yet recognized

Most standard institutional strategies can easily be implemented in a regular brokerage account by following recommendations from an independent advisor. The portfolio structure is similar, the instruments are the same. The difference is the absence of an extra layer of management company fees. For a $1 million portfolio, saving 1–2% annually over 20 years turns into hundreds of thousands of dollars. Money that stays with you rather than the management company.

Structured notes: the peak of financial engineering

Structured products generally fall into two categories. The first offers full or partial principal protection: most of the money is allocated to bonds or deposits, while the remainder buys an option tied to the growth of an asset or basket of assets. The second offers no protection at all: the client assumes full market risk in exchange for the possibility of higher returns. Both are heavily marketed within premium banking and brokerage services.

One of the main selling points is the supposed ability to generate returns in any market environment. The product is deliberately presented as technically sophisticated. Exclusive, prestigious, “the peak of financial engineering” – rather than simply a bundle of securities.

Options trading really is complex. Even many experienced investors and traders avoid it. Let alone a busy HNWI client. The idea of packaging such a strategy into a one-click product is reasonable in itself. But only if the solution is genuinely transparent and personalized.

In practice, things increasingly look different. The seller of a structured product earns money under any scenario – through embedded fees and transaction spreads. According to an estimate by Finosnova analysts, the average hidden fee embedded in structured notes ranges from 2% to 6% of invested capital per year.

Over three years, this becomes 6–18%. Meanwhile, the client does not necessarily make money at all.

A similar conclusion can be drawn from this analysis by Hubbis.

One particularly publicized case involved the son of a Perm-based entrepreneur who purchased 30 million rubles worth of structured notes and lost a substantial portion of the investment. Another equally telling example: a client walked into a bank intending to place a deposit, and walked out with a structured note promising “returns of up to 30% annually.” Within a year, 6 million rubles turned into 2 million – in the form of Mechel shares that had fallen fourfold. Mis-selling in this segment is unfortunately widespread.

After the start of the war in Ukraine and the introduction of sanctions, coupon payments on some structured notes in Russia were suspended: the securities became trapped in foreign infrastructure. Some brokers offered to buy frozen assets back from clients at steep discounts. Those who refused continued waiting – without payments and without clarity on timing. This issue, incidentally, applies to many foreign securities purchased through the Russian financial system.

Good structured notes do exist. Here are some of their characteristics:

• target return of 5–6% annually in hard currency
• transparent structure and understandable underlying asset
• total issuer and distributor margin no greater than 1–2%
• the client understands all scenarios in advance: coupon, principal repayment, loss
• allocation limited to 5–10% of the portfolio

Even in the premium segment, however, this approach is the exception rather than the rule. The market is dominated by products with high embedded fees, wide spreads, complex payout conditions, and aggressive autocall features. Distinguishing one from the other is precisely the role of someone working in your interest.

IPO and pre-IPO investing: “miracles” with a price list

“A unique opportunity to enter before the broader market!” “The first trading day delivered X%!” “The next major technology player!” Sound familiar? And it works: success stories are real, and people who earned substantial money from individual offerings do exist.

But it is important to understand the nature of the event itself: an IPO is a celebration for sellers. By the time a company goes public, there has already been a long line of people waiting to sell their shares: founders and executives compensated with stock options, venture funds that invested early, strategic investors, pre-IPO participants, angel investors. All patiently waiting for liquidity.

The issuer begins preparing for the listing long in advance: selecting investment banks, negotiating valuation, conducting a road show, polishing presentations.

The objective of all these wonderful people is the same – to sell shares at the highest possible price and in the largest possible quantity.

To you.

Welcome.

According to data from several independent studies, 60–80% of IPOs underperform the broader market over a 3–5 year horizon. Around 30–40% of shares trade below the offering price within the first year. In part because retail investors tend to receive the most aggressively valued offerings.

As for pre-IPO investments: the potential for extraordinary returns is real. But so is the failure rate. 90% of startups never make it to a public listing. Out of 100 companies considering a pre-IPO round, only one typically reaches an actual deal.

Now to the cost. Participation fees for IPOs through Russian brokers amount to 3–5% of the subscription amount. Importantly, the fee is often charged on the requested allocation – not the shares actually received. In 2024, the Central Bank of Russia explicitly pointed out that some brokers applied commissions this way. Deputy Governor Vladimir Chistyukhin described the practice as “hardly super fair.”

The pre-IPO segment is even more expensive: intermediary fees amount to 5–10% upfront plus 20% of profits. Issuers themselves spend up to 10–15% of raised capital organizing a pre-IPO round. Part of these costs is clearly passed on to the end investor, write Vedomosti.

In other words, you pay a significant upfront commission for access to instruments with structurally asymmetric outcome statistics. Rare success stories are memorable and heavily promoted. Numerous disappointments are not.

Real estate: the fee nobody notices

Real estate transactions illustrate the psychological asymmetry of how people perceive costs. In Russia, agency commissions range between 3–5% of property value. For a $500,000 apartment, this means $15,000–$25,000 per transaction. And most clients pay without hesitation – because “that’s just how the market works.”

In recent years, affluent Russians have actively purchased real estate in the UAE and Turkey. The picture there is no better. Engel & Völkers indicates average commissions of around 2% in Dubai. Though I was once personally offered 6% upfront simply for introducing clients to a new development in the Emirates – not by them, but still. On top of this comes the 4% Dubai Land Department registration fee. Altogether, entering a $500,000 property investment costs at least $30,000 upfront. In Turkey, total acquisition costs (commissions, taxes, and fees) on secondary-market properties range between 6–10%, while for new developments they may reach 15–25%.

These are all one-time costs, after which the asset simply sits there and “works” – or doesn’t.

The same person may perceive a 1% annual advisory fee as expensive. Even though in absolute terms this is only around $5,000 annually on a $500,000 portfolio – two or three times less than a real estate broker’s commission on a single transaction.

And unlike a broker, an advisor works with the client continuously.

Independent advisors: when everything is transparent

The independent advisory model works differently: the client pays not for access to a “product shelf” and not for the sale of a specific solution, but for capital architecture, discipline, and reducing the probability of expensive mistakes. The purpose of fee-only and fee-based models is precisely to make the cost of advice visible.

The Russian market for independent fee-only advisors is small but growing, gradually establishing its own pricing benchmarks. The standard fee for most advisors is around 1% of assets annually, declining to 0.5–0.7% for larger portfolios. One-time consultations cost around 10,000–20,000 rubles, while comprehensive annual support starts at roughly 150,000 rubles – economically justified for portfolios above 15 million rubles. Similar standards apply in Western markets: according to research in the United States, 1% annually remains standard for portfolios under $1 million, declining toward 0.5% for portfolios of $5–10 million.

This does not mean an independent advisor is automatically “better.” It simply means that in this model, the cost structure is visible: advice separately, infrastructure separately, taxes separately. In many cases, this ends up cheaper than the hidden monetization layers embedded inside bank products.

Becoming your own advisor

Finally, the cheapest option. Technically, that is true. With moderate trading activity, infrastructure costs can indeed remain within 0.3–0.5% annually. It is difficult to get cheaper than that.

But self-directed investors face another category of costs – behavioral ones.

Market timing mistakes, overconfidence, excessive trading, emotional decisions during crises – all of this tends to cost far more than the savings on advisory fees.

So when deciding between “I pay an advisor” and “I pay nobody,” these less visible costs should also be considered.

Sometimes the self-directed format is objectively the best solution. I, for example, do not use the services of an investment advisor. Perhaps because I am an investment advisor myself, have worked in markets since 2008, am fairly disciplined, and devote all my time to capital management. If that describes you as well – buongiorno, colleague!

Why paying an advisor feels psychologically harder

Behavioral economics has long studied a phenomenon known as “related fee aversion”: an explicitly stated payment creates stronger negative emotions than a hidden cost of equal or even greater size. Especially when the hidden fee is spread over time and presented in a confusing way.

The “lifestyle effect” also plays a role: people more easily justify expenses associated with status, service, and belonging to a privileged circle. Concierge services, airport lounges, private events – all of this feels like evidence of social standing rather than part of a sales funnel.

An advisory fee, by contrast, looks like direct payment for professional judgment and therefore creates more internal resistance. Even when it is economically more rational.

Ah, it is easy to deceive me! I long to be deceived myself!

The moral of the story

In investing, you always pay. The only choice is the type of fee: explicit or hidden, manageable or uncontrollable, neutral or creating conflicts of interest.

Which is why it makes sense to ask yourself a few direct questions.

• How much are you paying to maintain your capital – both in percentage terms and in dollars?
• How much of that amount actually goes toward expertise you truly need, and how much toward prestige and presentation?
• Why are complex and opaque solutions sold so aggressively – and who profits most from them?

If you do not have clear answers to these questions, you are almost certainly paying more than you think. In such situations, an independent second opinion is extremely valuable: not as an alternative to the bank, but as a way to see the economics of investment decisions without the marketing wrapper.

Final thoughts

Paying for status and convenience is perfectly normal. But investors should distinguish between paying for investment results and paying for service. The latter may improve comfort, but it does not improve portfolio returns. In fact, it reduces them.

Investment advisory services are paid under a separate agreement. What you are buying is not the pleasant feeling of VIP treatment, but clarity, structure, conflict-of-interest control, and discipline in capital management. A very different transaction – and a far more honest one from the investor’s perspective.