Madoff affair aggravates private banking fee spat

ZURICH (Reuters) - Private bank clients, already at loggerheads with wealth managers during the subprime crisis, are becoming more vocal in demanding lower fees after the Madoff scandal left many of them badly bruised.

Wealthy clients who parked assets with Swiss private banks and funds in other offshore centers feature heavily among the victims of a $50 billion fraud allegedly orchestrated by former Nasdaq chairman Bernard Madoff.

Many clients now complain that they pay too much for too little, especially as many of them have seen asset values shrink during the downturn.

"The pressure for lower fees is on and will continue to be there. Banks will need to work harder for the same fee," said Sebastian Dovey, managing partner at wealth management consultancy Scorpio Partnership.

"Clients will say: show me a better level of transparency and investment scrutiny."

But bankers may be resisting as they face spending more time and resources on the kind of research clients expect.

"Private banks... will cite the need to spend more time on fund and manager due diligence. To what degree do you pass that on to the client?" said Dovey.

Traditionally clients pay private bankers based on the assets they ask the bank to manage. Two private investors confirmed that they were looking to change this arrangement and pay instead a performance fee in order to align interests.

This would give private bankers less visibility on fee generation. Their ability to meet high fixed costs would depend wholly on the performance of client assets, and could be compromised in a poor year such as the last one.

Many clients have seen their portfolios badly dented by losses on once-highly rated securities linked to subprime mortgages, coupled with diving commodities and equities prices.

Madoff, who, experts say, specifically targeted high net worth individuals in offshore centers, may be the last straw.

"It is very disappointing that many important institutions did not protect investors. The due diligence process showed that Madoff was not safe," says Michel Benveniste, founder of third party hedge fund marketing company Etsior sarl.

DUE DILIGENCE IS BACK

In spite of protests from hard-hit banks such as Union Bancaire Prive (UBP) that they had done their homework and were hoodwinked in the same way as hundreds of other investors, some bankers are skeptical about the quality of due diligence at private banks.

The Financial Times reported in December that UBP had a $700 million exposure to Madoff-related investments.

In a bid to tighten its due diligence, the bank is now looking to invest only in funds that have an independent administrator, which was not the case with the Madoff funds.

Others may follow suit and also pay more attention to the quality of the auditing of certain funds.

"You can't completely guard against fraud but you can reduce risk. You have to think things through intellectually, not just look at numbers produced by models," says Martin Somogyi, Julius Baer spokesman. His bank has not invested in Madoff.

But one private banker, speaking on conditions of anonymity, said due diligence at private banks had been very stringent all along but some banks did not apply their own principles. "It would have been impossible for us to invest -- even via a feeder -- in a manager with a direct link to any one of the key service providers such as the custodian. But Madoff was riddled with such conflicts of interest," he said.

Asset firms may exploit the reputational damage Madoff inflicted on some long-standing private banks to lure clients.

"It's happening a lot, they are offering to raise their high water mark if clients switch from their private bank," one private bank client said.

"But generally clients are refusing, they have lost money this year and in many cases their banks have said they will not be charging a fee while clients remain underwater."

(Additional reporting by Lisa Jucca; Editing by David Cowell)