Private banking (or not)

12 Feb. 2017
Author
Roberto Plaja

That is the question: with individual and family fortunes in the hundreds of millions, what’s the point of private anything?

That is the question: with individual and family fortunes in the hundreds of millions, what’s the point of private anything?

That is the question: with individual and family fortunes in the hundreds of millions, what’s the point of private anything?

With age my capacity to listen to people with useless information has gone to 0 – and I’m not dead yet. During meetings with private bankers of all sorts I often need to suppress the urge of doing something that would land me in jail.


The writ is always the same: in attempting to give clients and prospects a sense of dedication, customization, fair-dealing and professionalism, private bankers (who are well-trained and well-paid salespersons) engage in endless chit-chat which has close to nothing to do with investing. Catchy and tongue-twisting phrases on current economic conditions and strategic “team” thinking are dispensed, together with obsequious observations and thoughtfully concerned looks. And good coffee, appetizing Danishes and voluminous presentation books filled with data which are not worth a fraction of the trees lost in producing them.


The blame for this charade goes in part to the clients and prospects themselves: often their need to be “entertained” prevails and, when that happens, they end up with what they asked for. It is tough to make most people understand that successful investing is not about “sexy” trades or “hard working” portfolios but about patience and a lot of stationary periods; that it is like watching grass grow.


Nevertheless, that large individual investors still have to put up with any of this is perplexing. Which begs the question: why do private bankers exist? The answer rests on economic incentives; the banking system’s, that is. A couple of decades ago a portfolio of $50-100mm would have made a perfectly nice account for an institutional asset manager. Today such an account is considered a relatively run-of-the-mill wealthy individual relationship, and individuals are considered different from institutional investors even though the underlying concepts for investing are the same. (True, there are some important compliance requirements addressing the vulnerability of less experienced investors, though I am often amazed at how easily the concept is lost on everyone – example: any structured product’s payoff graph.) Hence, the birth of private banking departments staffed with generalists and specialists in the art of covering such clients. The result is that individual clients are sold investment “products”, often repackaged concepts or strategies or other commercially attractive ideas which unsurprisingly are very profitable to the providers.


The solution is simple: individual investors should split the various roles involved in the management of their wealth to get sound advice and to minimize conflicts of interest. In practice:


[a] Get a qualified, fully independent no-retrocessions investment advisor;


[b] Ask your advisor from [a] to access the institutionally-priced services of your manager, bank or custodian;


[c] When offered coffee, Danishes and tickets to sporting or Broadway events, say no.


The results will likely be lower overall costs and higher investment results.


Don’t believe in the importance of conflicts of interest? Ask yourselves how many of the funds or structured products offered are owned by private bankers personally.


Tired of hearing about costs? Document yourselves on how difficult it is today to just match the performance, after costs, of any relevant ETF.


Sick of reading this blog? Close the tab.

With age my capacity to listen to people with useless information has gone to 0 – and I’m not dead yet. During meetings with private bankers of all sorts I often need to suppress the urge of doing something that would land me in jail.


The writ is always the same: in attempting to give clients and prospects a sense of dedication, customization, fair-dealing and professionalism, private bankers (who are well-trained and well-paid salespersons) engage in endless chit-chat which has close to nothing to do with investing. Catchy and tongue-twisting phrases on current economic conditions and strategic “team” thinking are dispensed, together with obsequious observations and thoughtfully concerned looks. And good coffee, appetizing Danishes and voluminous presentation books filled with data which are not worth a fraction of the trees lost in producing them.


The blame for this charade goes in part to the clients and prospects themselves: often their need to be “entertained” prevails and, when that happens, they end up with what they asked for. It is tough to make most people understand that successful investing is not about “sexy” trades or “hard working” portfolios but about patience and a lot of stationary periods; that it is like watching grass grow.


Nevertheless, that large individual investors still have to put up with any of this is perplexing. Which begs the question: why do private bankers exist? The answer rests on economic incentives; the banking system’s, that is. A couple of decades ago a portfolio of $50-100mm would have made a perfectly nice account for an institutional asset manager. Today such an account is considered a relatively run-of-the-mill wealthy individual relationship, and individuals are considered different from institutional investors even though the underlying concepts for investing are the same. (True, there are some important compliance requirements addressing the vulnerability of less experienced investors, though I am often amazed at how easily the concept is lost on everyone – example: any structured product’s payoff graph.) Hence, the birth of private banking departments staffed with generalists and specialists in the art of covering such clients. The result is that individual clients are sold investment “products”, often repackaged concepts or strategies or other commercially attractive ideas which unsurprisingly are very profitable to the providers.


The solution is simple: individual investors should split the various roles involved in the management of their wealth to get sound advice and to minimize conflicts of interest. In practice:


[a] Get a qualified, fully independent no-retrocessions investment advisor;


[b] Ask your advisor from [a] to access the institutionally-priced services of your manager, bank or custodian;


[c] When offered coffee, Danishes and tickets to sporting or Broadway events, say no.


The results will likely be lower overall costs and higher investment results.


Don’t believe in the importance of conflicts of interest? Ask yourselves how many of the funds or structured products offered are owned by private bankers personally.


Tired of hearing about costs? Document yourselves on how difficult it is today to just match the performance, after costs, of any relevant ETF.


Sick of reading this blog? Close the tab.

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