The Relationship Manager's Discretionary Fee
A private banking relationship manager (RM) manages 60 client accounts. The bank's fee schedule allows a discretionary "advisory fee" of up to 1.2% of assets, with the actual rate set by the RM subject to client agreement. An internal review finds that the RM charged one elderly client 1.2% for four consecutive years while charging comparable clients 0.6%. The client's file contains a signed fee agreement but no record of any discussion about the rate, no annual review notes, and no suitability assessment for the higher fee. The RM says the client "never complained" and that the higher fee reflected "more hands-on service." The client's portfolio underperformed the benchmark by 1.8% annually over the same period, and the RM received a bonus tied to fee revenue. The bank's policy requires annual fee reviews but does not specify how they are documented.
1. Evaluate the conduct and control issues raised by the fee discrepancy.
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Several distinct issues arise.
Fair treatment of customers. Charging the maximum discretionary fee to an elderly client while charging peers half that rate, with no documented justification, is difficult to reconcile with treating customers fairly. "More hands-on service" is an assertion, not evidence; the file contains nothing supporting differentiated service.
Conflicts of interest. The RM's bonus is tied to fee revenue and the RM sets the fee. That is a structural conflict. It is manageable only with strong controls - documented rationale, independent review, client communication - none of which are present.
Suitability and vulnerability. An elderly client charged the top rate on an underperforming portfolio raises questions about whether the service was suitable and whether vulnerability factors were considered. The absence of any suitability assessment for the higher fee is a gap.
Documentation. "Never complained" is not consent to a fee level; silence is not evidence of informed agreement. The signed agreement establishes the ceiling, not the justification for charging at it.
Policy weakness. A policy requiring annual reviews without specifying documentation standards is a design flaw that predictably produces exactly this outcome.
2. Recommend remediation for the client and for the bank's control framework.
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Client remediation. Reconstruct the fee history, compare against the policy and peer rates, and determine whether the charges were justified. Absent documented justification, refund the excess over the appropriate rate, with interest where required, and communicate clearly with the client in plain language. Review the client's overall suitability and consider whether the portfolio remains appropriate.
Individual accountability. Refer the matter to the conduct or disciplinary process; the bonus linkage and the pattern across four years are aggravating factors.
Control fixes.
- Require documented rationale for any fee above the standard rate, approved by a second person independent of the RM.
- Introduce periodic independent sampling of discretionary fees, with outliers flagged by client age, tenure, and rate percentile.
- Separate fee-setting authority from revenue-based incentives, or apply a conduct overlay to bonus calculations.
- Specify documentation standards for annual fee reviews: date, participants, services delivered, benchmark comparison, client agreement.
- Add vulnerability indicators to the client file and require enhanced review for elderly clients.
Monitoring. Report remediation metrics to the conduct committee quarterly until the sample shows sustained compliance.