MyPrivateBanking Blog
Daily Comments on the World of Wealth Management

Archive for January, 2010

What average long-term returns does your adviser expect ?

Monday, January 25th, 2010

I recommend an excellent analysis in the Wall Street Journal on how financial advisers fool themselves in respect to the expected returns. In a nutshell: A nationwide survey last year found that investors expect the U.S. stock market to return an annual average of 13.7% over the next 10 years. In fact the average answer for estimated average long-term future stock return after inflation, expenses and taxes was 6%.

The author argues that taking in account the previous mentioned performance killers the expected return before costs has to be in the range of 11% to 13% a years. Far above the average historical returns. And if investors have (what is more likely) a mix of stocks, bonds and cash the long-term net returns is more likely around 2%. His conclusion:

“The faith in fancifully high returns isn’t just a harmless fairy tale. It leads many people to save too little, in hopes that the markets will bail them out. It leaves others to chase hot performance that can’t last. The end result of fairy-tale expectations, whether you invest for yourself or with the help of a financial adviser, will be a huge shortfall in wealth late in life, and more years working rather than putting your feet up in retirement. (…) All this suggests a useful reality check. If your financial planner says he can earn you 6% annually, net-net-net, tell him you will take it, right now, upfront.  (…) Unless he is a fool or a crook, he probably will decline your offer. If he is honest, he should admit that he can’t get sufficient returns.”

You should do this test with your adviser and please let us know the outcome.


“Trust” in the Banking System is not Everything that Counts

Thursday, January 21st, 2010

In the last 2 years politicians, bankers and the media have done everything to restore „trust in the financial system and banks” in order to avoid a bank run and the subsequent collapse of the financial markets. But – the prevention of such a disaster aside – should “trust” really be the predominating goal in respect of banks and financial markets?

I have read an interview (in German) with a former board member of Volkswagen and nowadays PR-Consultant. Following his response to the question “How should people gain trust in the banking system again?”:

„Should they really? Trust is a trait of rather childlike character! People would do better to establish more scepticism and competence. If somebody wants to appeal to the baser human instincts – mainly greed – it would be very wrong to trust him. Consequently he could sell me anything he wants. Only crooks demand blind faith.”

Provocatively phrased, but correct in its essence: The heavily used feel-good phrase “trust” can only be one criterion among others in the process of deciding on which banker to take and which product to buy. Trust should be accompanied with a good dose of “control” and “knowledge”.


Almost 50% of UHNW Don’t Use Wealth Managers

Tuesday, January 19th, 2010

According to a recent report of the Spectrem Group the Ultra High Net Worth households (net worth of $5 million to $25 million) in the US kept last year a strong hand in the management of their assets: 47% of the 523 surveyed wealthy households stated to invest their assets without any professional help. 35% consult advisers, but make their own decisions. A mere 18% allow advisors to completely handle their portfolio management.

Stunning results, which most likely would have looked more in favor of the wealth managers two years ago.


Saving Costs of Currency Exchange

Monday, January 18th, 2010

One of our frequently contributing members posted an insightful group comment on the fees for currency exchange and options to reduce them. He was told by his bank that for a currency exchange he had to pay a commission of 1.5%, however, he got it down to 0.3% after re-negotiating the fee with his adviser. An unusually high discount, but still his experience is affirmed by other feedback we got from members.Currency exchange is expensive and provides a substantial extra earning for the bank. Especially because many clients underestimate the costs and also how often currency exchange is necessary when for instance the adviser recommends diversifying the asset allocation internationally.

To minimize the costs of currency exchanges clients should do three things: Firstly, have a clear idea of the long-term currency split they would like to have in their portfolio. A clear strategy prevents a rather unstructured changing back and forth of currencies due to changes in the asset allocation. Also it is worthwhile to check if the particular stock, fund, ETF etc. is quoted in various currencies, so that they can avoid currency exchange in their investments. Secondly and in particular when changing larger sums the investor should check possible discounts with his adviser. Thirdly, if he frequently trades assets in different currencies it can pay off to have an account with an online broker. Often they offer significantly lower fees.


Lots of Interesting Stuff On ETFs

Thursday, January 7th, 2010

Which was the best performing ETF in 2009? Which ETF could generate the most wealth for investors? Which ETFs did tank in 2009 and lose investors’ money?

If you want the answers to these and scores of other questions about ETFs in 2009, check out Morningstar’s great feature about the topic.

By the way, the most successful fund was a coal ETF (+145%), the MSCI Emerging markets fund by iShares produced the most wealth (USD 15.5 bn) for investors and leveraged short funds lost tons of money. I guess 2009 was no good year for the ETF bears….


Oxymoron: Active ETF

Tuesday, January 5th, 2010

Today I read the following:

“The actively managed exchange-traded-fund market is expected to explode as top mutual fund companies, including Putnam Investments, John Hancock Funds LLC, T. Rowe Price Group Inc. and Pacific Investment Management Co. LLC, consider entering the business or expand their lineups.The number of actively managed ETFs is likely to rise from the current 15 to more than 40, while the number of providers offering such funds could go from seven to 15, according to Rob Ivanoff, an ETF analyst at Financial Research Corp.”

Hmmmm….I used to think that the big point of ETFs is the passive index tracking most of them are following resulting in very low fees for the investor and an index matching performance? It seems that some fund firms think that they can use the label “ETF” as a marketing tool to sell old wine in new skins. Would these “active ETFs” perform better than their active mutual fund clones? Certainly not. Would they be cheaper? We don’t think so. Probably the only plus for investors would be the stronger transparency as holdings have to be disclosed daily.

Well, one thing seems to be certain - the mutual fund industry never runs out of ideas to protect their hefty fees…