“Wealth Managers’ Big Dirty Secret”

Recent research published by MyPrivateBanking received extensive media coverage from the world’s leading business newspapers such as Wall Street Journal, Financial Times and Frankfurter Allgemeine Zeitung. Our research “Wealth Managers Shun Transparency” made news by revealing that only 10% of the world’s most important wealth managers publish performance data for their discretionary accounts and only 22% offer specific information about their fees.

The Wall Street Journal’s Article “Financial Advisers´Little Secrets: Their Past Results” reported on our call for for more disclosure by wealth managers and, in particular, on MyPrivateBanking’s proposal of a “Charter for Ethical Wealth Management”:

(…) You can comparison-shop for almost anything online. But probably not if you're an individual looking for an investment adviser—at least not if you want to compare advisers' performance. While the performance of mutual funds is published daily and investment firms that cater to institutional investors are expected to publicly document their results, such reporting is rare among advisers who work with individual investors. Many money managers do offer performance numbers to prospective clients who ask for them in face-to-face meetings. But that doesn't make it easy to shop around. 

"When you buy a car, you check the Web for the basic data on price, quality and the colors available. You don't want to talk to the engineer for basic information," says Steffen Binder, managing director of MyPrivateBanking GmbH, a Switzerland-based firm that provides information and analysis for clients of private banks and wealth managers. "In today's world, every important disclosure is made on websites," Mr. Binder says. "We think publishing information on the websites is the gold standard of disclosure."

Why the lack of such basic information? After all, posting results would be "a clear advantage for good performers," Mr. Binder notes. (…) In June, MyPrivateBanking started discussions among its members—both investors and money managers—aimed at developing a Charter for Ethical Wealth Management that would include a call for easier access to advisers' performance results. (…)

Under the headline “Wealth Managers’ Big Dirty Secret”, Tom Stabile of the Financial Times picked up our research as well, focussing specifically on the reason why U.S. banks fared the worst in our research:

(…) “The missing ingredient is transparency, and elite wealth managers around the globe – and particularly in the US – have long been stingy about publicly disclosing data on fees and the performance of standard portfolios. A recent analysis of the websites of 40 of the world’s largest wealth managers by Switzerland-based MyPrivateBanking research found few divulging useful fee or performance data. 

“In a nutshell, [such] disclosure has not been done because this would really heat up competition,” says Steffen Binder, research director for MyPrivateBanking. “Wealth managers are not used to competing on price and performance.” Mr Binder says this inclination towards secrecy obscures good returns and favourable pricing just as much as it covers up poor-performing portfolios and fees that bake in “kickbacks” to fund managers, and other embedded costs effectively hidden from clients. 

MyPrivateBanking rated the wealth managers on a set of best practices, including disclosure of each broad category portfolio’s performance history for at least three years, as well as a detailed accounting of fees for standard services and commonly added charges. It found only 18 per cent of the 40 wealth managers were offering precise, quantitative data on fees, and just 8 per cent publishing at least a three-year track record on performance on their discretionary accounts.   

The US fared the worst, with not even one large wealth management player scoring a single point on the consultant’s seven-point scale for disclosing performance data, and only one, Deutsche Bank, scoring points for “precise” fee disclosure. Mr Binder says the US tends to have less use of discretionary portfolios, but the firms in the study include many that offer some form of them. Clients are awakening to how such data can reveal those wealth managers who “massively underperform the market or massively overcharge” with fees that eat away at net returns, Mr Binder says. And scrutiny from regulators is also mounting in a surge of financial reform legislation.”(…)

Of interest to our french-speaking readers is the feature L´Agefi published on this topic, “La transparence remise en cause”.

For our German speaking readership we would recommend two extensive features on our latest research brief “Why Private Banking Clients Should Avoid Internet IPOs” that were published by the Frankfurt Allgemeine Zeitung “Vorsicht bei Internetaktien” and the Neue Zürcher Zeitung “Wiederholt sich das Dot-Com-Desaster”.

These summarize of the results of our research into why investing in IPOs of internet companies is a bad idea and why banks are again pushing clients in this direction.