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!


  1. for Vanguard funds the amounts purchased must be min of US $100000. I read that mr Tan Kin Lian tried to source for the fund in spore to be sold in smaller lots for small investors to no avail.

    Do you know where we can purchase this index fund?

  2. I think one way out is to open an account with the US brokers like Etrade or Optionsxpress etc. You will then be able to buy anything that is listed on the US market. Including Vanguard funds.

    You have send some money to US and other nitty gritty to settle, so it's a bit troublesome though.

  3. being a banker is not just about selling products. its about giving customer a full service wealth mgmt which goes byong investment. It includes liabilities mgmt,insurance etc. Its for people who do not have time to run around and require a 1 stop for their needs To simply judge assuming that everyone has ur time/knowledge or just ur needs is a sweeping statement.
    Just consider the analogy. We know how much it cost for a plate of noodle but why wun we cook it ourself and pay much less. for many reasons like they do it better, I dun have to buy the ingredient or wash dishes, I wun have to waste the time to cook etc.
    I'm a banker but I do not consider myself unethical. I do not get customer to buy and buy. I provide my customer with updates and depending on their style of investment, I give the advice. The decision still lies with the customer. I can just get them to buy and buy w/o considering their needs but I'll lose all my customer in time to come. I'm here to build a long term relationship with my customer. I'm a relationship manager, not salesman

  4. Oh we got a private banker! It's always nice to hear views from the opposite camp. Thanks for the inputs Gerard.

    My post is very biased bcos I have to attract people to come. So must write something sensational mah! Nowadays being a blogger isn't easy also. Like all jobs.

    As for private banking, I guess the system is in place to churn clients and private bankers/relationship managers are simply part of that machinery. Although they may genuinely want to help the clients, it's easier said than done.

    I am sure no PB/RM out there starts with the attitude that is, "I am here to churn clients and make tons of money for myself". Just as no insurance agent would think like that. But the system is very powerful. It is easy for PB/RM/agents to lose focus and simply work on their targets.

    So the incentive system is already not aligned. Why should your bonus be tied to the the AUM garnered or revenue AUM? What about tying to the client's P&L?

    I understand that some pdts sold to clients have margins as high as 5%. Well since on average investment can make only 8%, how can the client earn a good return? How can it be that PB/RM work in the best interest of the client if they recommend such a pdt? But the PB/RM must hit their targets. It is not an easy job.

    I guess the ultimate litmus test would be whether any PB/RM would engage in other PB/RM to help them manage their wealth. After they know how the industry works inside-out.

  5. Hi, Just had to answer your suggestion first- "What about tying to the client's P&L?"- that probably won't work in the longer run as it would encourage a short-term mindset and some of the wrong behaviours. In the end, it would deviate very far from long-term wealth creation process.

    My feel is that Gerard's point on cooking a plate of noodles is a nice way of describing the current situation. I take the liberty of twisting it slightly. Buying a plate of noodles is a transactional process- you buy the noodle, you pay, you eat, you go. You may or may not come back again. Much like today's bankers, they call, they sell, they close. If it wins, good. if it bads, well, that's the end of that transaction. But 2 bucks in the pocket.

    There are issues with the industry, some of which you have mentioned. The issues would probably surface if the financial markets (including all the related asset classes) continue to stumble along. A boom-bust cycle perhaps? Any consolidation at this stage would be ideal. Much like the insurance industry, it would give the (my) industry a chance to look itself in the mirror and set up standards (both ethical and knowledge), refine the remuneration process, set up monitoring agencies or self-governing bodies and basically allow the real quality to show over all the fluff in the industry now.

    Clients have a fair share of the blame to take. Virtually all of them are trained to chase, and chase, and chase that latest topic, stock, trade, etc. "Hey give me some tips", "Hey, why didn't you call me about that _____. Its jumped 20%!" (fill blank with hottest stock of the moment). When the sh*t hits the fan, and the crunch comes, they turn around and start to blame-allocate.

    Litmus test: Ask a private banker about wealth management, asset allocation, value investing, wealth preservation, building, life-cycle investing, etc. Don't give them time to research. Check out the answers.

  6. Hi Joe,

    Very good points raised. Esp clients doing blame-allocate. I totally agree! Not just banks that are unethical!

    I also agree that tying the RM/PB's pay to client's P&L may not be feasible based on my logic.
    If we really think long-term, then the RM's recommendation can only be justified after 5 yrs, so no bonus for first 4 yrs? Haha, quite ridiculous.

    But I also think that the current system is quite bad. It only encourages churning. But then maybe that's really what clients want.

    It's a strange world really. And Value investors are really aliens in this world.

  7. Hi 8percentpa,

    I have been reading your old posts since discovering your blog last week.

    While this post was written almost 6 years ago, the topic has become even more relevant today. Major banks all over the world are raising their bets on private banking and the number of HNWI in Singapore has gone up.

    The problem with the financial services industry is that it is plagued with conflicts of interests and perverse incentives. This applies to private bankers. A private banker may have innate good character but if his workplace incentives reward him to behave in a way that may not be beneficial to his clients, can we blame him in behaving badly over time?

    Suppose we are in the bankers' shoes. Can we really honestly tell our clients that we will always be on their side if we are not really rewarded to do so?

    The Wall Street crash in 2008 taught us that smart and energetic people are extremely dangerous when they are driven with the wrong incentives. Again, we should not blame the people but rather blame the bad incentives that drive them.

    As long as the incentives are wrong, there is substantial risk that good people become bad over time, not to mention people who are already bad from the start. There is no point in assessing private bankers on an individual level to sieve out the exceptions if these perverse incentives persist.

    I have no doubt that if the general public take your advice to buy index funds or ETFs, they will be much better off.