…It will always be about your money” . Private bank Hyposwiss is running an advertisement making fun of the UBS claim “You and Us” . Unfortunately, UBS has just changed the ad claim to “We Will Not Rest” making the Hyposwiss joke look a bit yesterday…

Deutsche Bank set another prime example on how to push dubious investment products in their client portfolios without taking on any risk, but charging absurd commissions.  In 2006 Deutsche Bank promoted a fund in Ferris Wheels called Global View. However, so far not ferris wheel has been built, but nevertheless the fund spend up €208 million for property purchases, banking fees and dubious project development costs. So it looks like the average  investors will incur huge losses, but how about the sponsor and sales arm of the fund Deutsche Bank ?

“For Deutsche Bank, though, the Ferris wheel project turned out to be very good business. The Frankfurt-based bank earned €19.2 million through Global View thanks to its client advisors, who drew in €160 million from the bank’s customers within the space of 10 weeks, primarily from German small investors like Schmidt. The bank itself, however, never invested in the fund. Global View used the bank Delbrück Bethmann Maffei (DBM) instead. Deutsche Bank preferred not to invest its own money in the project, for example through loans. Even when that money was badly needed, the bank declined on the basis of a “market risk” that couldn’t “be assessed and covered by the bank. [...]

The letters and e-mails raise suspicions that Deutsche Bank not only insisted on unusually high commission rates that were meant to be concealed from investors, but even doubted the project’s chance of success. From the beginning, the bank calculated using an “equity commission of 12 percent. The sales brochure was only supposed to show 10 percent, which called for a creative solution. One Deutsche Bank employee suggested in writing that the excess commission simply “no longer be shown in the brochure”.

To me that looks less like a creative but more like a criminal solution !

Group discussions in March covered a broad range of topics. As always we and other members are grateful for information on how much one pays its wealth managers and we got several new postings, the latest on all-in fees (”Fixed income €2.000.000: 0,6% all in Equities and options €2.000.000: 0,8% all in”) by CDrewing. Still the differences between the providers are very high and we congratulate 7chiffres for his excellent negotiations skills: For currency exchanges exceeding USD 20k he pays only 10 basis points on transactions. A number we have so far only seen for amount of USD 100k and more.

7chiffres is not only a good negotiator, but also follows a sound strategy and has a good reasoning on why he manages his assets himself.

“(..) It helps to remember you don’t have to give 1% or more every year to some 3rd party, and will most likely end up with better returns. If, like me you made your money yourself (vs. inherit), it also helps to remember that in comparison with the effort to earn the money, the effort to preserve it (my goal is preservation with moderate growth) is really not that big. Another way to think about it if you have built a business yourself, is this: would you just give control of that business to someone else based on a few meetings and no public track record and then stay away from that business hoping for the best? Probably not” (read full post)

It is worthwhile to also read his other post on his experience and usage of wealth managers and as well investment strategy,

Talking about avoiding the pitfalls and hidden cost of investment vehicles. Our member Obsidian gave other members an excellent recommendation on how to design a contract so that an investments does not only pay-off for the Private Equity Company, but also the investors.

“Always build a minimum floor return exclusive of fees, costs and commissions. If you deposit a substantial principal amount, normally in excess of $3M, your fund manager will agree to a floor. This is normally never discussed but it is available to the savvy investor. Remember the fund agreement is merely the starting point of your negotiation and engagement with your fund manager. In a market where cash is king you have more negotiating leverage than you can imagine.” (read full post)

Our very active member Solarcell brought to the attention the harsh consequences new US regulations have on investors. Thanks! In fact we also felt that these changes in regulation deserve a far higher publicity than they got so far and published our analysis and opinion on the site.

While the interest and inflation rates are still close to record lows our members are rightly looking ahead and continue to discuss ways on how to avoid the negative effect of future inflation on their wealth. Our member Pedro was so kind to share his strategy:

“(..) I bought some real return bonds, paid down my mortgage and actualized future projected consumptions (major renovations on our principal residence, and I am planning to be purchasing land for a possible future second home as soon as the renovations are over). Some wrote about investment real estate, I would be careful about that because of its inherent negative carry. If it procures you some positive marginal utility then go for it, but if you are only going to worry about it and do not enjoy having to maintain it (like I would) then I would not do that.” (read full post)

Thanks to all of you for sharing your experiences and insights ! Every post helps fellow members to gain transparency in the rather opaque wealth management market.

I just finished the bestseller “Too big too fail”, delivering a behind-the scenes and moment-by-moment account of the months between the fire sale of Bear Sterns in spring 2008 and the announcement of the biggest bailout in history in October 2008. Drawing on hundreds of hours of interviews with the key players the Author Andrew Sorkin of the New York Times was able to write a kind of real-life thriller on the struggle of overpaid bankers and overwhelmed politicans to save the financial systems, there companies, jobs and even more so their egos. A gripping book one reads with disbelief on the lack of self-awareness and competence of main players, but also a lot of amusements on how the “big” world of finance and business comes down to surreal realities in the face of disaster.

One of these hard to belive events is a check over USD 9 billion! that literally saved Morgan Stanley and the jobs of its 45.000 employees in the very last minute. Hand delivered by a Japanese delegation and picked up by a banker wearing flip-flops….

Again sensitive bank data on offshore-accountsgot stolen. Again these information are offered to the government of the account holders. Again the government seems to be willing to bend the law and to pay for these illegally acquired data.  In our recent analysis on data theft we preditcted that these kind of “private banking data auctions” will happen again and again untill the stolen assets become worthless.

Whistle blowing, breach of confidentiality, and the outright theft of files recently has been enormously popular among some employees of offshore banks. It is almost impossible to stop such individuals. They have the potential to completely destroy the reputation of financial centers like Liechtenstein, Luxembourg or Switzerland, and a lot of damage has been done already. If there are no more potential buyers for confidential customer files the business is gone. But this would be only possible when the banks convert offshore to onshore customers. Or, alternatively, show the door to all customers who are unwilling to co-operate.

Is the popular uprising against Wall Street that near? Some Goldman employees obviously think it is better to prepare for the worst and get their hands on a few new guns. Not sure if this is the right way to hold on to these overblown bonuses.

The New York Times discusses a new study about the effect of the financial crisis on the wealth of  top-investment-bankers. Yes, you guessed it right: The impact is rather small. Everybody can still keep those luxury condos, yachts, and expensive paintings (the exception being Bernie Madoff…). The study says that

“… it is an urban myth that executives at Bear and Lehman were wiped out along with their companies. Though the chiefs at both investment banks lost more than $900 million in their stock holdings, the professors argue that it is important to also consider all the riches the bankers took off the table in the years preceding the crisis.At Lehman, the top five executives received cash bonuses and proceeds from stock sales totaling $1 billion between 2000 and 2008, and at Bear, the top five received more than $1.4 billion, according to the study, which was released on Sunday night.”

Not very surprising, you might think. But if you put this situation in a historical context, you should think back to the days when all the big investment banks were private partnerships and a bankruptcy would indeed wipe out the personal wealth of the partners. Just consider how much things have changed over the last 30 years or so:

Prior to 1970, all NYSE members had to be partnerships (and in those days, stock brokerage provided the bulk of industry earnings). That meant partners had their wealth tied up in the firm. The line at Goldman was that partners lived poor and died rich. (….) Moreover, if a firm went bankrupt, as Lehman did, the partners were personally liable. The creditors could seize their personal wealth. And those pay based incentives DID matter. Goldman was incredibly risk averse, both from a legal standpoint and in how it was cautious about deploying its capital (that does not mean it was not greedy, please, but was greedy in ways that had low odds of hurting its franchise).

I guess if we want to avoid another financial disaster we have to somehow get these 1970s kind of incentives back into pay packages…

In our recent “Survey of Top European Private Banks” we were surprised about some of the respones and feedback we got during and after our visits with the advisers. Our favorites:

Blunt honesty: In two cases the advisers made pretty clear that they feel ok with their current employer, but neither could honestly tell the client who will own the bank two months from now nor what a change in ownership would mean for the client and his portfolio. Thumbs-up for honest answers.

Vast differences in size of proposals: From a one pager to a 47 page compendium. In respect to the proposal sizes private banks really differ.

Language mix-ups: We came across one company website that is only available in French and another that is offered in English, French and Italian, but not in German – the language with the largest population in Switzerland and Europe. But what really puzzled us was the one proposal written in an unclear mix of English and French. Maybe impressive on a restaurant menu, but certainly not for a client.

Madoff madness: The adviser of one major player promised to mail us the proposal once his bank has sorted out the “Madoff Mess”. Well, Mr. Madoff is waiting for his trial and we are still waiting for the proposal. The adviser of another bank that got heavily hit by the Madoff fraught just shrugged when asked about the consequences for the bank. He gave the trust winning comment: “No worries. The bank is not affected. It is only client’s assets”.

Have you had any strange experiences when talking with a private banker for the first time ?

Your total net value: Leave your banker in the dark about your total net value. You are treated much better as a client when your banker imagines you being even richer than you are.

Your past investment mistakes: Everybody makes investment mistakes but why should you admit them to the guy who has definitely made more investment mistakes in his career?

When you are unsatisfied with your other banks or wealth managers: He might feel too good about himself (even though he is not good enough).

That you feel good about how little fees you pay: Most wealth managers are always on the lookout for reasons to increase visible and invisible fees. Avoid to give them any.

When you expect a liquidity event: Your phone will not stop ringing. Nothing makes a wealth manager more aggressive than the prospect of net new money because big bonuses are waiting.

That he is your only banker: If that was the case, you should hurry to find another one anyway.

That you are happy about the performance: Except if he is such an exceptional investor who has consistently beaten the market for many years. Then hire him.

With the imprisonment of Bernie Madoff and the recovery of the stock markets it seems like that the public eye on Madoffs Ponzi scheme is going down as well. Nevertheless, for (hopefully) a long time his name will stand for a so far unprecedented fraud and therefore investors should take their lessons and understand what really happened.

For those who are interested to dig deeper I recommend the reading of the “Madoff Chronicles”, a series of rather long features (you better print them) on his rise and fall, published in Vanity Fair. It is well researched and offers profound insights on his “system” and family-business, the role of funds and banks feeding him with billions and the greed and naivety of investors. Since the articles are not written for the “Economist” they include a fair share of amusing side notes, making it fun to read (at least as long as you have not been a client).

If you like these articles you might be interested as well to learn more on the role of the biggest feeder fund in the Madoff fraud, the Fairfield Greenwich Group, which alone “entrusted” USD 7 billion of its clients money to Madoff. Finally, if you are sick of Madoff and the Upper East Side Crowd and need some sunshine check “Pirate of the Caribbean”. A feature of Allen Stanford, who managed to rise from a Texan gym owner to running the second biggest Ponzi-scheme ever. During his “big times” it looks like he certainly had a lot more fun than Madoff. Now it seems their “luck” has changed, since Stanford awaits his trial sharing his cell with ten inmates and heated by the strong Texan summer sun.