What the private banks don’t tell their clients…
Tuesday 22 July 2008
According to Citywire HSBC Private Bank is closing its stockbroking business, telling clients to leave by 1 October for one of a number of wealth management firms.
The bank is understood to be shedding clients who use it on an advisory basis who have assets of less than £1 million invested all or partly in direct equities.
HSBC refused to confirm the move to Citywire or the rationale behind it, but in a letter to investors it said: ‘Following a detailed review of our business and strategy, we have decided that we will no longer offer a stockbroking service within the private bank. ‘I know that you have been a client of ours for a number of years, and I can assure you we have not taken this decision lightly. In the long run, however, I believe this move will be in the best interests of both you and the bank.’
All sounds rosy. The bank is doing it in your best interests! Actually that’s great news if you are one of the lucky ones they are saying goodbye to!
But here comes the final statement “Sources close to the situation have said that the move is intended to allow the bank to focus on its higher-margin private banking activities with investments handled through its in-house collectives service.”
The point is that the private banks are looking to sell high margin products to high net worth investors. With the credit crunch still permeating through the system, I have already said investors can’t sit on the laurels with these banks. It is important to review your portfolio. Ask for an alterative view; build your knowledge to protect yourself and hopefully you will end up with a successful investment experience.
If you do not know what questions you should be asking the banks, call us, and we can help.
Categories: Asset Class Management
posted by Murray Round Wealth Management @ 14:39,
Incentive fees fail to deliver
Monday 21 July 2008
The idea that when you give your money to an investment manager who is rewarded for performance is a good idea. It should be a win win scenario. Yet, whilst the idea is excellent, the reality is somewhat off the mark.
Steve Johnson of the FT July 20 2008 reports on latest research from Grant Thornton. He writes “The increasingly widespread adoption of performance fees by UK-listed investment trusts has benefited investment management companies but been of dubious benefit to investors, according to research by Grant Thornton…..The evidence suggests that the principal effect of performance fees has been to increase financial returns to the management companies.”
The problem for investors is they do not really know if the fund manager is capturing alpha - neither do they know if the benchmarks from which the fees are measured are actually fair and reasonable. In fact, the FT writes “Further, two-thirds of performance fees did not come with a high water mark, meaning a manager could be remunerated simply for returning a trust to its highpoint prior to a slide in net asset value.”
When a manager wants to introduce performance fees, clearly the lower the benchmark, the greater the opportunity they have of achieving performance fees. Also, the fund managers want the opportunity of repeating the performance, so only ever achieving a one off performance fee is not attractive to the manager. So one would think, from an investors perspective, increase the benchmark to a higher level. Yet that could mean the manager takes on more risk to be rewarded. If they fail, it’s your money they are speculating with. To some extent, it is a no win situation.
For most investors perhaps the answer is to say no to performance fees, and find a manager that is looking to capture beta with low charges.
Yes, it’s what we do. But common sense eventually tells you that…
Categories: Asset Class Management, Active Funds, Index Funds
posted by Murray Round Wealth Management @ 14:33,
Markets are falling: what does Warren Buffett say? Buy or Sell?
Tuesday 15 July 2008
Berkshire Hathaway held its annual shareholders meeting in May. The company, run by Charlie Munger and Warren Buffett (the world’s richest man), continues to do well, though Buffett warned shareholders not to expect continued stellar returns as in years gone by. “Anyone that expects us to come close to replicating the past should sell their stock,” Buffett said. “It isn’t going to happen. I think we’re going to get decent results over time, but we’re not going to get indecent results.”
What were his views on falling stock markets? Take a look at his 1997 letter as it contains some advice appropriate to our current volatile market.
“A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.
But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.“
That’s the portion of the letter that is most often quoted. But I think the next few paragraphs are just as interesting because they demonstrate how he puts this philosophy into practice.
“For shareholders of Berkshire who do not expect to sell, the choice is even clearer. To begin with, our owners are automatically saving even if they spend every dime they personally earn: Berkshire “saves” for them by retaining all earnings, thereafter using these savings to purchase businesses and securities. Clearly, the more cheaply we make these buys, the more profitable our owners’ indirect savings program will be. Furthermore, through Berkshire you own major positions in companies that consistently repurchase their shares. The benefits that these programs supply us grow as prices fall: When stock prices are low, the funds that an investee spends on repurchases increase our ownership of that company by a greater amount than is the case when prices are higher. For example, the repurchases that Coca-Cola, The Washington Post and Wells Fargo made in past years at very low prices benefitted Berkshire far more than do today’s repurchases, made at loftier prices.
At the end of every year, about 97% of Berkshire’s shares are held by the same investors who owned them at the start of the year. That makes them savers. They should therefore rejoice when markets decline and allow both us and our investees to deploy funds more advantageously.”
As JD Roth says "So smile when you read a headline that says “Investors lose as market falls.” Edit it in your mind to “Disinvestors lose as market falls — but investors gain.” Though writers often forget this truism, there is a buyer for every seller and what hurts one necessarily helps the other. (As they say in golf matches: “Every putt makes someone happy.”
It’s sensible advice, but so easy to forget when you see the value of your investments plummeting. And this is just one part of one shareholder letter.
(Warren Buffett's annual letters to shareholders)
Categories: Asset Class Management
posted by Murray Round Wealth Management @ 09:47,
Bank leaders are a disgrace to capitalism
Tuesday 8 July 2008
The last sentence in his article in the FT on July 1 2008 , Luke Johnson says; “ The arrogance of certain of our top bankers is a disgrace to capitalism, while many of the board members of the Big Five appear to have been asleep at the wheel in the past couple of years.”
No pulling any punches there!
My point is whilst the points are valid, as an investor you have to ask so what? How does it affect me? At face value it may not appear to. Yet, the banks have overstepped the mark. They are looking for capital. They also need to increase revenue. This is where is affects you. You need to be on your guard with your savings and investments. The banks want to sell you profitable business for them. But profitable business for them is not necessarily profitable for you!
It is time for investors with portfolios with many of these big institutions, including the private banks and wealth management arms of these firms, to start reviewing their portfolios now. An independent review should be standard for all investors…an investment MOT!
Categories: Asset Class Management, Research
posted by Murray Round Wealth Management @ 12:56,
Why the fund managers, private banks and wealth managers are failing investors.
I find the FT the first place to look for comment in the financial world and found Merryn Somerset Webb writing about “Get yourself more money and sense” on June 27 2008
Bypass the introduction, and go straight to the interesting bits… “So, if you’ve got money – say anything from £250,000 – how do you choose one of them(banks, fund managers) to look after you? They might come to you of course. Keep too much money in an ordinary bank account and a 20 something manager from its wealth department will find your phone number and promise you 7 per cent a year for ever. But how will you know if he can make good his claims? You can’t. A wealth manager doesn’t come with a ready list of performance figures – you can’t see an index that tracks his exact performance over any given period of time."
Murray Round Comment: If they can’t really explain performance and how it was derived, how can you have faith to invest with them in the future? It is easy for us to understand the importance of this issue, after all its what we do, the hard part is for you, as an investor, to recognise its significance. If you do, I am sure you will be calling us.
“Anyway, as one senior financier said to me recently, what difference would it make if you could? Most managers are far too young to have a clue about how to manage money in a real bear market. So, these days, past performance numbers have to be treated not just, as is usual with suspicion, but as utterly irrelevant."
Murray Round Comment: Ouch, too young! But it’s your money they are managing. Perhaps applying the research that is available, if you know where to look, might be a better route.
“Still, there are questions that will help on the way to finding the right manager. One place to start is to wonder if you want your money to be looked after by any of the institutions that have recently proved so monstrously incapable of looking after their own money. Say Citi or Merrill Lynch, for example. If you think not, you won’t be alone. Most of these big names have, says Scorpio, have seen “disappointing asset growth” over the past year.“
Murray Round Comment: So why give your money to these institutions who are making an absolute mess, surely its time for a change?
“And staying away from them is probably no bad thing – subprime losses or not. The bigger the institution you choose, the more likely you are to have your portfolio managed sausage-factory-style, the more expensive “structured products” you’ll find you own, and the more likely it is that your money will find its way into an in- house fund (these aren’t all bad, but they are mostly not exactly what the industry likes to call “best in class”).“
Murray Round Comment: In other words, they need to sell you investments that make the most money for them. Is that what you are really looking for?
"Next, ask where your money will be invested. For all the excitable talk of alternative asset classes and diversification, the average private client portfolio remains very traditional. Late last year, I looked at one held for an elderly lady by one of the UK’s bigger managers. It had been put together by someone who clearly thought diversification was not so much about having exposure to the UK, Asia, the commodities sector, a few hedge funds and a little Latin America as about owning Bradford&Bingley as well as Barclays."
Murray Round Comment: It’s gone from bad to worse. No real concept of diversification. I feel sorry for the elderly lady in question.
“Ask about asset allocation (much more important than stockpicking) and about fees. If the latter are more than 1 per cent or so a year, they are far too much. Remember, the up front fees are just the beginning: there’ll be transaction fees too and the management fees embedded in any funds your manager buys on your behalf.“
Murray Round Comment: Asset allocation has been shown through research to be one of the main drivers of returns over time and fees and charges erode returns. Yet so many charges are implicit. We know about implicit charges, so does the FSA, but most investors find it almost impossible to get to the bottom of these charges without independent professional help.
“Then ask about staff turnover. Wealth managers move all the time and every time they move they’ll try and make you move with them. That’s boring, but forming a relationship with a new manager at the same institution is boring too. And if your manager looks like he might stay put, ask how many clients he has. If you’re a smallish client (under say £500,000-worth of assets), you may find he has 100-plus clients. That might not matter, but it will mean that when you call there’ll be five minutes of pointless chat while he scrabbles around in his spreadsheets trying to remember who you are.”
Murray Round Comment: Without doubt this is a dreadful indictment of the state of big financial institutions managing wealth for clients. Of course you may think it’s not happening to you, but perhaps you should look again. It's knowing what questions to ask..perhaps then you will get some answers that will help you make better decisions. There is no doubt the big institutions have ridden rough shot over countless investors..and these investors are often high net worth.
So start building your own knowledge to help protect yourself against these institutions. Even better, find someone like ourselves who operate independently of the fund managers, take no commissions, and maybe you will have a better investment experience over time. Enough said.
Categories: Asset Class Management, Diversification
posted by Murray Round Wealth Management @ 12:23,
Time for the new in pensions shake-up
Thursday 3 July 2008
Whilst Barry Riley of the FT is writing about pensions, he is really writing about how money should be managed. It applies to everyone.
The first statement he makes is, “In the current transitional stage the big winners are passive managers and asset liability product providers: FTfm’s 2007 table of UK pension fund managers published on June 9 was headed by Legal and General, Barclays Global Investors, Insight and State Street.”
Whilst we have known so for some time why this is the case, most investors still do not recognise these facts. It is understandable because traditional investment management firms, stockbrokers and many financial advisers don’t want you to know these facts. It would put them out of business! Instead they want to talk to you about something that keeps them in business. But take a leaf of these pension managers’ books and go passive.
I know passive is boring, and so is the appeal of buying and selling, winning (but not losing) is attractive. But as Riley states; “High-risk, high-return strategies abound but have only limited credibility and appeal. The history of mutual fund investment gives a clear warning that actively-minded individuals are drawn irresistibly into chasing trends and fashions if they are given a free choice. Returns in the long run are damaged.”
He continues, “The shake-up in pensions is inevitable: in a very real sense, fund managers’ bluff has been called. Since 2000, risk has failed to generate enough return. Too many high-return mandates – benchmark plus 3 per cent, say – have been signed and too many clients have subsequently been disappointed. On average, after costs, alpha is by definition negative and the pensions sector is quite logically retreating to a beta-driven and liability matching strategy.”
As an investor, alpha and beta may be nonsense, but we would encourage you to find out a little more about them. Most investors by default are searching for alpha (excess return put very simplistically)…but many are not capturing it. If the leading pension funds managing billions can’t find it consistently, what chance have you got with £100,000, £500,000 or even £10m!
Categories: Asset Class Management, ETF's, Index Funds
posted by Murray Round Wealth Management @ 12:02,
Going for gains, not income
"Private investors are increasingly looking to fill their portfolios with funds that aim to generate growth, rather than income, as the reduced tax rate on capital gains can significantly enhance returns", says Sharlene Goff of the FT on June 27 2008
"So wealth managers are working on a number of strategies for clients looking to take advantage of the new 18 per cent tax rate on capital gains, rather than pay the higher 40 per cent charge on income."
Without doubt our role is to keep focused on changing legislation to find opportunities to help investors maximise their after tax returns. Yet, being tax efficient is not the main priority, it is part of the cost of investing. Understanding your appetite for risk and building a well constructed portfolio with asset classes being the driver is the main objective. Thereafter if it is possible to find ways to minimise any taxation, then seize those opportunities!
Categories: Asset Class Management, Risk
posted by Murray Round Wealth Management @ 12:00,
The Authors
Nicholas Round
Nic is the Managing Director of Murray Round Wealth Management Limited, who seeks to ensure the advice provided is truly independent. Based in Shropshire with clients local, national and worldwide, Nic has strived to find the best possible service for his clients needs, by researching and studying the market, trends and philosophies. Nic strongly believes Asset Class Management will bring his clients Financial Freedom, Independence and Happiness.
Kirsty
Kirsty is our communication guru. Managing information requires considerable due diligence and her passion for organisation gives the clarity we all seek. From Shropshire, with a Psychology Degree and much travelling, she is now back in Shrewsbury...and London often, keeping us all at Murray Round focused.
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