As wealth managers, are we still taking time to truly understand clients’ needs? Whatever happened to the consideration to recommend what is best for clients’ proﬁtability? Where is that ﬁduciary duty, that putting clients’ interest ﬁrst?
It’s been a long time since I wrote a provocative piece. Frankly, I hate to do so. You get called names, receive unfriendly letters and get ignored at industry functions. Not everyone can be or like to be a Simon Cowell (American Idol’s infamous judge). But I am so burdened with many issues happening in the wealth management industry, that I feel I must speak my peace.I had a chance recently to meet wealth managers from several private banks. On one occasion, one of them who is from a huge US private bank told me he is paid 100% by commissions. He told me this is better for him as he earns more. Also, he is constantly looking for ideas to encourage his clients to transact, so that he gets paid higher. On another occasion, I was sharing the investment management process with a group of wealth managers from one of the largest private banks in the world. I was telling them how after deciding the allocation to the appropriate asset classes, we need to choose the best of breed instruments to ﬁt that allocation. They laughed and said if they were to do this, they will never be able to meet their product targets for that quarter. The last incident happened when I accidentally overheard a group of wealth managers from a local bank discussing about product incentives. They were sharing with each other on which products to sell so that they can reach their target faster. This is our wealth management industry: The obsession for income amongst the wealth managers and only caring about personal and corporate proﬁts and targets. I am not suggesting that there are no ethical wealth managers around, but going by my more than a decade of experience, they are really in the minority and they won’t survive too long in their jobs.
Over the last few years, the wealth management institutions have been recruiting aggressively. In an article by The Edge dated 24–31 December 2007, it was reported that many of these wealth managers are young and inexperienced and have been pushing structured products. They are highly paid but also easily change their loyalty to a higher paying competitor. Just over the weekend, a foreign bank put up a recruitment advertisement to attract relationship managers. I almost fell oﬀ my chair when I read their expected key responsibilities:
• New clients’ acquisition and active cross–selling
• Be a proxy to clients’ key decision makers with a view to increase the Bank’s market share
• Bring in new clients and convert these quickly into proﬁtable, multi–product relationships
• Constantly win new deals from existing clients
• Executing a coherent account strategy for each client to maximize the overall proﬁtability from the portfolio
I am deluged with frustration and disappointment at this point of writing. Just to make sure I don’t get assassinated, I’ll leave you to conclude for yourself what they are saying.
As wealth managers, are we still taking time to truly understand clients’ needs? Whatever happened to the consideration to recommend what is best for clients’ proﬁtability? Where is that ﬁduciary duty, that putting clients’ interest ﬁrst? Well, I guess that is second to corporate proﬁts and my loyalty belongs to whoever pays me most. In a report by Straits Times dated 24 February 2007, it was reported that a new monied class, known as the “core aﬄuent” group, are being aggressively courted by big players in the priority banking and private banking segments. This is because banks ﬁnd this segment a lucrative one. It is reported in the same article that banks can charge core aﬄuent customers higher margin of 3 percent of the investment amount in contrast to the 1 percent margin for private banking clients. I don’t know about you, but I will run as fast as I can from these institutions because they are rolling out their “red carpet” for me with target hungry and proﬁt maximising wealth managers, so that they can charge me more. It is probably this senseless obsession with income and proﬁts that has caused the biggest ﬁnancial blow up in the ﬁnancial markets recently: The Sub–Prime Debacle.
We all know now that sub–prime mortgage products under the disguise of a Collateralized Debt Obligation (CDO) structure and given thumbs–up by credit rating agencies have caused markets to tumble in the past few months. When these structures were sold, very few people understood what exactly they were, except that they are sophisticated products only suited for the aﬄuent. The sad thing is that the participants in these instruments have all made their money except for the investors. The brokers who arranged the sub–prime loan, the banks that gave the loans and then later sold it oﬀ, the investment bank that bought the loan and repackaged it into structures that are sold by fund managers and wealth managers have all profited from it. Even the rating agencies who later on regretted in their rating decision have been paid a fee. CEOs of institutions have been given a pat on the back, promoted, received bonuses and high salaries when they sold truckloads of these products and brought much profitability to their institutions. They may leave the bank later on, but are still paid. The poor investors, however, have lost much to what has been termed, as “an honest mistake”.
So we are now in a crisis. Banks have been writing down billions of dollars of losses. But does that mark the end of these institutions? Hardly! As we all know it, Sovereign Wealth Funds have been coming in to rescue theses institutions. They will once again arise and tomorrow will be a brand new day. CEOs and wealth managers will move on. New product ideas and structures will emerge once again. Mistakes will be forgiven, repeated until something huge bad happens again. King Solomon in the Bible says: “that there is nothing new under the sun”. Due to greed, whatever has happened, will happen again.
On Sunday Times dated 2 March 2008, an article reported that financial players are wooing cash–rich en bloc residents, and in particular Farrer Court’s residents. It seems like some residents are actually endorsing the banks’ aggressive tactics by saying it works better. For financial institutions that have respected their privacy, some of these residents complained that they didn’t take the trouble to reach out to them. I was actually sad and disheartened to read this. Why are we rewarding those who aggressively sell us? Why are we allowing and encouraging the industry to do what it has been doing? What should we do then?
CHOOSING YOUR MANAGER
If you are financially savvy and enjoy managing your own money and can manage your money rationally, don’t waste your own time. You really should not even use a wealth manager. You avoid unnecessary expenses, and becoming a victim to wealth management. You may in fact do better than all the so called “ﬁnancial experts” out there. But however, if you really do need advice, consider some of these points:
• Are they working for me or for their own pocket?
• Are they serving you, selling to you or guiding you?
• Are they professionally competent or is their financial education lower than mine?
• Are they independent in their advice?
• Do they have a credible track record?
INVESTING, NOT SPECULATING AND KEEPING IT SIMPLE
In this time of market volatility, let’s hear what Warren Buﬀett, John Bogle and Benjamin Graham, the true legends of investment management ﬁeld have to say. Graham says that if you are looking for short term returns, you are speculating. Only by looking longer term, you are truly investing. The 3 of them all agree that the best way to capture long term stock market returns is to own all the companies that make up the market. This is done through simple, passive, low cost instruments such as index funds and Exchanged Traded Funds(ETFs). Buﬀett said that even the previous Fed’s Chairman, Alan Greenspan were to whisper to him what his monetary policy would be for the next 2 years, he would not do one thing diﬀerent. Graham said that the market measure sentiments in the short run but measure the true value of a business in the long run. But Bogle understands that there is emotional involvement in investing. He said that in order for investors to have the courage stay invested for the long haul, moderate the volatility of your investments by asset allocation and that is spreading your eggs in diﬀerent baskets. In short, these real investors are telling us to keep our investment simple. Avoid complicated structures that are hard to understand as they usually come with high expenses and performance fees. Invest long term and ignore the noise in the short term. Spread your money so that the volatility of your portfolio will not cause you ulcers and that you can comfortably stay invested.
I hate money, because I have seen how the love of it has caused the ugliest side of human to surface. But I enjoy the options that money provides. Money is the means to a greater end, if the end is what you really want. Money does not buy happiness. Contentment does. I have been writing for the past 5 years about the ugly side of wealth management. I have gotten my fair share of backlash. So please make my eﬀort worth it. Stand up against bad practices. Don’t encourage it. If you don’t play this game of wealth management, the industry can’t play theirs.
The writer, Christopher Tan, is Chief Executive Officer of Providend, a Fee-only Retirement Financial Adviser. Besides being financially trained, he is also an Associate Certified Coach with the International Coach Federation. The edited version has been published in The Business Times on 5th March 2008.