Saturday, November 10, 2007

And how to tackle private bankers?

The private banking industry is booming in Asia and more so in Singapore. Hence we see banks like Citi, UBS, HSBC hiring bankers by the truckloads. They hope that their legions of private bankers will be able to capture AUM (Asset Under Management) and then they can churn their clients to collect lots of fees. Btw, that won't be the official stance, the official stance would be to help HNWIs (high net worth individuals), manage their wealth, do tax planning, investments etc. Sadly, 99% of them (my own guess) will fail to do their jobs.

Traditionally the private banking industry has done good segmentation and actually the name, "private banker" is only reserved for those in the highest hierachy, ie bankers that serve the richest clients, the UNHWI (ultra high net worth individuals, whoa, that's a cool acronym right? Go tell your wife/gf that you will become a UNHWI someday, hehe).

But now, everyone wants to call themselves private bankers, so even those behind the counters whose jobs are to con aunties and uncles into buying some crazy pdts by offering them free umbrellas call themselves private bankers.

Anyways, the job of the private banker is to help clients manage their wealth. But their commission is based on two criteria. 1. How much money they can con their clients to put with the bank. 2. How many pdts they can con their clients to buy.

The second criteria is what makes it most unethical bcos they must continuously sell clients new pdts in order to hit their tgts. ie like maybe 10 pdts per mth or something. And next mth, it's another 10 pdts. So they have to ask the client to buy pdt A today, sell pdt A next mth, then buy pdt B and sell B next mth and buy back pdt A etc. But we know that investments can only generate good return over the long run right? Btw long run means 10 to 20 yrs hor. If you buy and sell stuff mth in mth out, you are just generating comission for the banker, which is what they want and will not help you build your retirement nest egg.

So what is the best way to tackle the private bankers and the best way to do investment? The short answer is you don't have to talk to private bankers.

For most people, the best way to invest would be to buy index funds that have the lowest fees. Index funds are funds that try to mimick the performance of an index, like the STI, Hang Seng, Nikkei, S&P500 etc. They don't employ fund managers who claim that they can beat the benchmark, they just buy whatever is inside the index and hence most of these funds have no sales charges and minimal mgmt fees.

In Singapore, MAS has made some regulations on unit trusts/funds that cap the sales charge at 3% or something. That's actually still too high bcos investment on average only give you 8% per annum. So you pay on 3% on your first year of performance, you are left with 5%, that's a mere 2% better than fixed D! Imagine buying a PC and you need to pay the salesman 20-30% ie $200-300 of commission! On top of them, you pay 1% mgmt fee every year, usually for fund managers that will underperform the benchmark. So my own personal policy is to refrain from buying unit trusts whenever possible. But sometimes, unit trust can help you gain access to some sub-sectors that are not easily investable, eg. environment/green stocks or energy stocks etc.

Look for index funds that have 0% sales charge and probably 0.5-0.8% mgmt fee per year. Lower fees mean higher return back to you. One of the biggest index fund seller in the world is the Vanguard Group. It may be hard to get their pdts in Singapore though. That's when you get the help of the private banker, ask them to source all the index funds available. If they are any good in the first place, they can help you. My guess is: it's more difficult than striking lottery.

After you buy the fund, just leave it there. Don't be bothered by the daily or weekly or even monthly fluctuations, over the long run, all indices will go up, if history is any accurate, you will earn 8-10% per annum, ie you double your money every 6 to 8 yrs. When you have more money to spare, you should just buy more of the same. Of course, you can exercise some judgement and buy indices of growing economies, like China, India etc. Or diversify globally, ie. have some of these hot economies, but also of US and Europe and Singapore.

That is the simple truth about investment, just buy index funds, and you will do ok. Disappointed huh, why so much hype around financial advisers and private bankers right?

But what about stock picking? Next post!