Risk Management: Megabanks Wealth Management Advice Still Dangerous / Toxic for Clients

I was recently shown an investment proposal by a prospect that shocked me. It was produced in October 2014! The prospects ‚Megabank‘ advisor had proposed he sell around 15 of his current single stock holdings, representing around about 25% of his portfolio.

This is what they proposed do to with the money generated through the sales: Of ~CHF 1.1m they wanted to channel over 800k into their own products.

Description CHF %
New Purchases
Megabank Fund – Global Income 234’340 21.46%
Megabank – ETF SMIM 188’067 17.22%
Megabank Fund – Mid Cap USA 182’468 16.71%
Megabank Fund – Emerging Markets Rising Giants 206’420 18.90%
An oil company 90’657 8.30%
A chemical company 88’273 8.08%
A luxury goods company 43’329 3.97%
An oil company 58’463 5.35%
Total 1’092’017
Megabanks Products 811’295 74.29%

Note that the ‚Megabanks‘ products represented close to 3/4 of all proposed changes. Only 1/4 of that was intended for the low cost ETF.

All the ‚Megabank‘ products except the ETF were ones that paid the ‚Megabank‘ advisor close to 1% in yearly fees and had a TER (total expense ratio) of close to 2%. This information was of course buried deep on pages 30-50 of the proposal and spread over several pages.

Now, having studied portfolio theory it’s clear that the advice given, would have had no diversification value at all if implemeted.  As the portfolio was already well diversified the additional value of the actively managed funds (comprised of many stocks) would have a negligeable affect on market risk.

The only advantage of the portfolio changes would have been to the ‚Megabank‘ bottom line. As long as I see advice like the above being given out, I know that independent wealth management and independent advisors have a very bright future as they can highlight these, to put it bluntly, robbery attempts. Such proposals give the term bank robber a new meaning. Also hearing the prospects surprise at my summary, the clear black on white table including the switching costs and ongoing costs (not depicted above) reinforced my belief that independent advice is so valuable.

Unless, and this is very important: The ‚Megabanks‘ and/or politicians and regulators can influence a) legislation making it more and more expensive (time consuming) to fullfill many rules & regulations that add no value to customers.  b) legislation that forces independent wealth manages to have at least 4-5 employees. c) make it expensive for independent asset managers to do business as they often need a recognised brand name custodian bank (a ‚Megabank‘). d) most ‚Megabanks‘ make it attractive for the independent wealth managers to have most or all their clients with just them by imposing high minimum assets under management rules.

Thankfully I am currently working with some banks that offer reasonable rates. But they are very rare and often fees need to be renegociated on a regular basis. This job of hard negociating with absolutely no emotional or financial ties is another thing I find is of added value to customers (who often can’t be bothered to argue with their banks customer relationship manager).

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