Banks…hate them or love them..we still need them!
Sunday, 16 November 2008
I want to be kind to the banks, yet their primary activity to act as a payment agent for customers and to borrow and lend money has gone somewhat astray. This means, we as consumers need to keep the banks at arms length. We need them for some things, but not for others.
As you will know the world's governments have been providing capital for the banks. Perhaps at some stage in the future, governments will want an exit strategy by offering the shares to investors. In the meantime, the banks will want to build their capital base. That means they need money and that money comes from all of us. Higher rates to borrow; lower rates on savings; hidden margins on investments. Investors will need to be much more diligent when dealing with banks.
It is important to understand what service you want from your bank, but say no to anything you do not understand. Want an example? Here's a starter for 10! Structured products.
What are structured products. Take a look at the link and then come back to the blog.
The banks sell structured products to investors. These products often look attractive to consumers as they are marketed well. The advantages appear to be all with the consumer yet they are not transparent - which meansas investors you do not know what the bank really makes from these products. If a bank is selling these products, they will not do so unless they are profitable to the bank. The question is how profitable? Who is more likely to do well from buying these products, the investor or the bank? When an investor starts to delve a bit deeper to find out more about these types of investments, you might find the risks are greater than you may have envisaged. In fact, the recent market downturn has highlighted the downside risks.
In the FT on November 16. Steve Johnson writes "Didier Pitton, product marketing director of Odyssey Financial Technologies, which provides front and middle-office solutions to the financial sector, said Private banks "did not explain the downside risk and many clients have been forced to take delivery of stocks that had lost 30-50 per cent. The client advisers themselves sometimes did not understand the risks," said Mr Pitton, whose company services more than 200 financial institutions in more than 30 countries, including 15 of Europe's 25 largest banks."
Perhaps a word of warning here then….
In another article at the FT investors have discovered that a number of retail structured products which offer a return linked to an index with "guaranteed" capital protection have only been as safe as the company providing the guarantee.
"Buyers of the more than 1,000 structured products issued by Lehman Brothers found themselves facing losses following the bank's liquidation, and the prices of exchange traded products issued or guaranteed by other investment banks dropped sharply on concerns over creditworthiness. Many of Merrill Lynch's "ELDeRs" structured products had the now-rescued Bradford & Bingley as one of their counterparties, while products from Close Investments were based on bonds from the collapsed Icelandic bank Glitnir."
My point is that investors should think very carefully before undertaking these types of investments. If you as investor do not understand the risks, why invest your money? Keep it simple. Invest into things you understand.
Over the next few years savers and investors will need to be much more diligent with their money and a little less trusting of their banks. Caveat emptor!
posted by Murray Round Wealth Management @ 11:16,
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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