MyPrivateBanking Blog
Daily Comments on the World of Wealth Management

Archive for April, 2010

Let the Bankers Fail

Tuesday, April 27th, 2010

“The trouble with Wall Street isn’t that too many bankers get rich in the booms. The trouble, rather, is that too few get poor — really, suitably poor — in the busts. To the titans of finance go the upside. To we, the people, nowadays, goes the downside. How much better it would be if the bankers took the losses just as they do the profits”

In an editorial for the Washington Post James Grant captures the essence of what financial reform should be all about. I think the same principle should apply to private wealth managers. Why not have fee arrangements that reward an adviser for profitable strategies and make him pay for bad advice?

“The job before Congress is to bring the fear of God back to Wall Street. Not to stifle enterprise but quite the opposite: to restore real capitalism. By all means, let the bankers savor the sweets of their success. But let them, and their stockholders, pay dearly for their failures. Fair’s fair.”


Mutual Fund Investors Rarely Get It Right

Monday, April 12th, 2010

The New York Times reports:

“Mutual fund investors usually get the direction of the stock market wrong. Just before the market declines, they generally move money out of their bond funds and into their stock funds, and just before it rises, they shift their money in the other direction.

These are the findings of a new study that provides yet more evidence that most mutual fund investors would fare better if they didn’t try to time the market. And because so many fund investors try to do so anyway, the study suggests that these fund flows provide a new sentiment indicator for gauging excessive pessimism or optimism.”

I would add to these findings that, in many cases, the investors’ financial advisers have to take the blame for the wrong timing decisions. In a study MyPrivateBanking did on the quality of investment proposals of European private banks one of the major outcomes was that the banks proposed an extremely bearish portfolio to potential new clients just when the markets were at their lowest point in early 2009.

The New York Times comes to the conclusion that the decision making of mutual fund investors can be seen as a good indicator on future market moves:

“For several months before the beginning of the bull market in March 2009, for example, fund investors on average transferred money out of stock funds and into bond funds. It’s a common pattern. Little wonder, then, that the average mutual fund investor would be far better off if he never engaged in stock market timing.”

This is exactly the same pattern we have observed in the investment behavior of the big wealth managers’ portfolio management. It would be interesting to research to which extent the irrational behavior of private individuals has been influenced by the advise of their professional wealth managers. The bottom line of this study confirms again that market timing is mostly a trading-fee-generating strategy benefiting the banks rather than the investor.


Goldman: Under Pressure

Wednesday, April 7th, 2010

Business Week carries a great, long story on Goldman Sachs and how the firm is been forced to defend itself against a public perception that they have been the epicenter of the global financial crisis. The magazine sums Golman’s situation up:

“Business is booming, but Goldman, which once prided itself on avoiding the ostentatious and on making money for the long haul, is a different firm, with a perception problem that mere explanation can’t solve. In committing to market-making at all costs, the firm has opened itself up to forces beyond its control. The question is: Has Goldman Sachs shorted itself?”

The article can’t answer the question whether it was Goldman who brought down AIG and whether Goldman really sold shoddy CDOs (collateral debt obligations) to its customers only to turn around and short these CDOs, effectively betting against its own clients. What becomes clear however is that Goldman,  the hallmark of global banking, is under a lot of pressure. Pressure that may translate into new regulation constraining its business model.


Our Favourite Group Postings (March)

Thursday, April 1st, 2010

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.