Bankers still welcome? Colin Lawson shares his frustrations on banks' approach to investments
By Colin Lawson
I recently saw an amusing sign in my local dry cleaning shop: “Bankers still welcome” it proclaimed. It made me realise just how bad banks’ reputations have become.
In our efforts to acquire additional assets under management, we regularly analyse the existing investments of prospective new clients. In this process, I have had the opportunity to review the recommended portfolios from the majority of the UK’s retail banks as well as the more exclusive private banking arms.
The analysis has identified a number of themes and common poor practices that, in an industry as highly regulated as ours, should never be allowed to happen. While it is great news for us, as it allows us to clearly identify why we are different, it is bad news for the thousands of clients who still trust bankers to look after their hard-earned money.
So, here are a few themes I have identified:-
1. Opaque charging structures.
I always ask potential new clients what they think they are being charged and it is almost always significantly lower than the reality. Clients remember the headline annual percentage rates; however they often fail to realise the impact of dealing commissions, switching fees and retained renewal commission.
In one case, these additions trebled the fee!
Another client believed that there was no initial charge on setting up his portfolio and was shocked to discover that the bank paid itself £21,000 in commission for selling its own product. He was even more shocked to discover that there were fees if he wanted to leave.
Technically, in all cases the bank did nothing wrong and everything was disclosed, but when you have to wade through a mountain of paperwork and the salesman glosses over the small print, it is easy to see how things go wrong.
2. Inactivity.
In today’s rapidly changing investment world, it is essential portfolios are constantly altered to take advantage of opportunities as they arise to try to defend against losses as well as increase returns.
For one individual, I reviewed every annual statement from one of the leading private banks and it was apparent that they had only made two changes to the asset allocation in a five-year period. I would not mind so much, but the client was paying for their active management service and had £2m with them.
3. Product bias.
Another portfolio I saw had half the money invested in tracker funds and half the money invested in the bank’s own in-house funds. The trackers outperformed the in-house funds every time. How can they justify selling funds that cost significantly more but deliver significantly less?
4. Tax-planning implications.
Using the correct product structure in conjunction with effective tax planning can result in savings which are large enough to cover our fees. Unfortunately, this element of the advice process seems to be lacking and it seems to me that, in the main, high street banks sell onshore investment bonds to basic rate taxpayers and private banks sell offshore bonds to higher rate taxpayers.
I have not got the scope within this blog to detail why this is inappropriate; however, I can assure you that, in both cases, unnecessary tax of circa two per cent of the amounts invested is payable by the clients.
5. Irrelevant benchmarking.
I deliberately avoid benchmarking our portfolios to a specific index as I have not yet had a client whose objective was to outperform indices such as the Association of Private Client Investment Managers and Stockbrokers (APCIMs) or Morgan Stanley Capital International (MSCI) World. Instead, I believe it’s more relevant to aim for income or growth levels in line with a client’s objectives and circumstances.
I was shocked to see one particular bank benchmark its performance against a basket of equity indices and then deduct their own fees from that benchmark. Why? The whole point is that I can buy a tracker at 0.20 per cent per annum so if I pay you a management fee of two per cent per annum, I need you to outperform the index by 1.80 per cent p.a. before you deduct your fees - and I need you to do it each and every year.
If I was running a dry cleaning business, 'bankers' would not be welcome!
Colin Lawson is founder and managing partner of Equilibrium Asset Management www.eqasset.co.uk