My foray into private banking

Investing / Portfolios
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Long story short: Due to horrible circumstances my friend inherited a portfolio of individual stocks in excess of multiple 100k’s. I was asked to come look over the info after he met with the families private banker at a cantonal bank since he knows I’m interested in investing.

I am a boglehead (I think, never read the book, but I subscribe to the philosophy) so my investment strategy is: diversify and keep costs down. So I have everything invested in VT through IB (after careful studying various sources, among them this board).

My jaw dropped when I saw the conditions they charge:

  • 0.65% of the invested sum for “wealth advice”, if you let them invest for you (basically they do everything) it’s 0.95%
  • if you wish to invest yourself without their advice the cost of the E-Depot is 0.25% (minimum 50 CHF per year)
  • buying the commission 0.4% for swiss stocks and 0.5% for foreign markets (minimum 40 CHF, max. 1000 CHF) which doesn’t include fx-commisions.

The portfolio they’ve put together with the deceased is pretty much all the firms of the SMI minus the finance ones with some firms way overrepresented compared to the SMI and others underrepresented (76% of the portfolio is in the SMI). A little over 20% is iShares SMI ETF, SMIM ETF and EuroStoxx ETF. It seems to be mostly firms with higher dividends like Roche and similar ones. For my calculation the yearly dividend (based on the banks forecasting for this year) is about 4.5%.

The cumulative net performance over the past 10 years was 43% (since they wrote net I assume it’s after they take their share) compared to for example iShares SMI which was 102.21% (I assume it’s before TER)!!! The yearly net performance was 3.58% (again, assuming after they took their share). My jaw dropped again because they apparently said it was a great performance over the past 10 years! To be fair, what else would they say in that situation…

The yearly dividends are somewhat attractive to my friend since they’ll be much more than just investing in SMI or VT. And because the stocks is “all” he got at this moment it’s a substantial yearly amount. But considering the cost associated with with the trading “platform” and their meager performance I’m trying to convince my friend of other options, mainly ETF considering he’s got a investment horizon of 20+ years.

A couple questions that did come to me looking over everything again:

  • I’m not sure what other investments the deceased had, maybe that decreased the cost substantially. But if not the banks are pretty much commiting highway robbery at 0.65% - 0.95% + commisions on trades!
  • About 7.5% of the portfolio is invested in iShares ETF SMI… Why would they do that when most of the portfolio is in the SMI anyways? To smoothen the volatility of the portfolio?

I just thought it’s interesting :slight_smile:

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Assume that any financial advisor is lying straight to your face until proven otherwise.

My guess is that they were getting retrocessions from iShares at some point in the past. Then decided that “rebalancing” a portfolio of individual shares is more lucrative for them.

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Unfortunately I think this is very standard for private banking. Yes IMO it’s complete robbery especially since these dudes don’t even provide solid advice and rely on completely unreliable forecasts to make asset allocation decisions and time the market.

Also yiiiikes at the home bias and risk clustering.

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Hm, maybe. Unfortunately I can’t see when they started to buy the individual stocks or what other positions used to be in the portfolio. That would’ve been interesting.

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A friend of mine invests his money in a similar fashion.

A few things I’ve noticed:

  • When he started investing with the bank they benchmarked only the last ten years, saying that my friend’s investing horizon is ten years. They neatly cut off the 2008 financial crisis. A rising tide lifts all boats…
  • They also almost exclusively chose Swiss companies. I think it’s because their customers know the names and confuse familiarity with security and performance?
  • Transaction costs are billed separately. Therefore, his banker is constantly adding new titles and selling others, telling him how he’s seeing opportunities here and risks there.
  • My friend proudly tells me what phenomenal profits he’s making. But he’s not checking what a comparable index would be doing.

Naturally, he’s not very well versed in finance topics – and he’s in good company: Financial knowledge in society is quite low. I usually keep my mouth shut, as he often reacts in anger if I even just suggest that he asks his banker a few questions. Maybe it’s because he knows it’s not a very good solution. But it’s a convenient solution that makes him feel good, and I think that matters most for him.

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I agree about the misplaced incentives, but what is the better alternative for a non-financially savy, mid-wealth person in Switzerland?

1% fee on 500k assets is “only” 5k/yr. That doesn’t pay for a lot of hours of highly qualified expertise

The person getting 4.5% dividend yield + price appreciation is still better off than leaving cash in the bank.

Most of us on this forum are lucky we don’t need to pay for such a service

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Of course, as long as the portfolio chosen by the bank has its risks spread out properly, it’s still better than not investing any money at all.

Indeed we are!

It’s a talent, for lack of a better word, that pays off on many fronts.

Lucky us! :sunglasses: :smile:

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Passive investment with a robo-advisor would lower the fees quite a bit without any additional effort. TrueWealth with 0.25%-0.5% p.a all-in fee. Or investart with a 0.3% p.a. all-in fee. ETF TER still comes on top of these fees, of course. TrueWealth provides an eSteuerauszug. I don’t know whether investart provides this as well.

Trading 212 might also be a reasonable and low cost option. I don’t have any personal experience with it, however, their Pies&AutoInvest feature looks interesting (possibly similar to M1, which is not available here). You do need to choose which ETFs to invest in, so you either need a bit of knowledge/research or have someone else set it up for you - or choose a strategy from the ‘Pie Library’ but that sounds risky if you don’t know what you’re doing. I suspect they don’t provide an eSteuerauszug. However, you can always pay a tax advisor to fill out the tax declaration for you.

Paying a fiduciary by the hour to define a suitable investment strategy for use at Trading 212 would likely also be much less expensive than wealth management with quarterly fees, if there is a substantial sum to invest.

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I agree but a certain amount of knowledge and confidence is needed to trust a robo advisor. I can’t imagine my parents doing this.

Ps One thing I would like Switzerland to do is to ban retro commissions from fund providers. This was done in the UK already ~10 years ago

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I work at one of the most exclusive private bank in CH and I would never use their services for my own self.

From my experience, it starts to make sense when you’re in the 9-digit zone.

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If you don’t mind. Can you elaborate on why?

Is this because access to private equity funds, pre-IPO stocks at low prices, very cheap loans as indirect services, tax and financial planning advices offered, etc.?

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I’d like to push back a little.

Please don’t read this as a defense of the private banker looking after the portfolio or as an endorsement of active management.

It just seems some of the judgements passed would need further data to corroborate the case. Maybe further data would indeed confirm your conclusions, it’s just not clear to me from what I have read.

The “wealth advice” fees don’t seem excessive to me for active investing. And it sounds like this what the original investor chose as an investment category?

Perhaps, as you allude to below when describing the portfolio, the original investor asked for a hand-picked high return portfolio instead of running with a bunch of run-off-the-mill ETFs and was averse of finance titles because of the Great Financial Crisis, in which case hand picking those securities actually costs money if you don’t want to do it yourself.

Not saying active investing is a good idea, just saying that if you decide that’s what your private banker should actively do for you, it’s going to cost money (or time, if you decide to do it yourself).

Disclaimer: I actively manage a substantial portion of my portfolio myself. My main appeal is being able to grow yearly cash flow from distributions for covering our expenses (versus having to sell a portion of the portfolio every year). While I’m currently beating my benchmark, this is not my main goal at my stage of life.

Hm, I’m not sure I agree without understanding the investment schedule.

You’d have to know when the investments were done to be able to make comparisons.

If it was lump-sum all-in at portfolio inception, then using the commulative net performance seems mostly appropriate (and comparing it to the total return of the SMI or some comparable index would be right). And your points would be mostly correct.
I say mostly because we don’t know what the original investor asked for (e.g. steady high distributions versus total return over x years).

If the portfolio was accumulated over time, i.e. it had a bunch of inflows that were invested over the past 10 years (leading up to the final sum inherited), you would need to use the TWR (time weighted return) of the portfolio to make any comparisons to the total return of any index over the same time span.

In essence, it boils down to measuring how well the portfolio manager was able to actively allocate capital at any given time – whether it’s investing 50k in October/November 2021 or investing the same amount in, say, March 2020, or sometime in the 2008/2009 crisis – versus passively investing the same amount into e.g. their benchmark index.

Unless your friend is financially savvy (which it sounds like he isn’t) I would tell your friend to go see an independent financial advisor (i.e. not associated with a bank or any other entity interested in selling you their products) to get professional advice tailored to his needs, investment horizon, risk tolerance, etc.

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yes, you nailed it pretty much AFAIK. Access to secondary/private markets, Lombard loans and premier customer service by your designated banker are the selling points.

It might make sense for affluent clients who neither can or want to manage their money themselves (and there are a LOT of people like this, especially when we talk family wealth). Would not recommend for guys interested in finance, unless you are in HNW/UHNW territory, where a lot of individual discounts are applied again.

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Oh absolutely! I’m not saying they are stealing money (even though I said “higway robbery”, but I meant it compared to “our” fees"… I hope that was clear). The deceased chose this and since I knew him personally, I know he did everything for a very good reason! Then again, I know he played a huge part in choosing the stocks, which makes the decision to pay fees instead of doing it himself more baffling to me. Like I said, I assume he had more investments with the bank which may have decreased his fees substantially.

Hm, I’m not sure I agree without understanding the investment schedule.
You’d have to know when the investments were done to be able to make comparisons.

I am aware of that and unfortunately the data disclosed to my friend (or rather given to my friend since I wasn’t present at the presentation of the data) did not include this information. So I can’t speak to when and how much was invested at any given point. I can just go from the data given and the yearly returns in percentage. So no matter how much was invested at any point, there were just two years where the “market” (read: SMI or VT for comparasion) was beat (2015 and 2018) by the banks portfolio. Or am I wrong? I’m genuinly asking, not being a dick! I didn’t disclose the yearly percentages to not make the original post more confusing.

Any advice on how one would go about finding a truly independent advisor?

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A couple of thoughts:

If you don‘t do your own taxes, you pay someone doing it for you. If you can‘t or don‘t want to change your tires, you pay someone doing it for you. If you don’t paint your walls, you pay someone else doing it for you. If you don’t move your furniture to your new apartment, you pay someone doing it for you. So we would certainly agree that doing things on your own will save you money. Sometimes just a couple of bucks, sometimes thousands of CHF.

Banks and bank employers aren‘t evil, they just do their job and get paid for it. What‘s debatable is if it‘s worth the price and what you are getting for it. The answer is obvious for us (higher than average intelligence, very interested in finance, tech-friendly and generally well educated). But not that obvious for others.

Can you blame someone that didn’t grew up with smartphones and the internet, with 6-7 figure assets, that they have a hard time trusting a RoboAdvisor (TrueWealth) or a digital broker (SQ, Degiro, IBKR) without any people that they know? Can you blame people for being financially uneducated?

Those are way better off with suboptimal investing portfolios and fees than just sitting in cash doing nothing. Or even worse: Investing with an online broker, without anybody to talk to, get nervous during a market crash and sell everything at the bottom.

Our way isn‘t the best way for everyone despite having the best outcome.

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That type of asset management is a hangover from the days when stock trading was not widely available to the general public. For people who could not invest directly, 43% percent was a very decent return compared to a savings account or investment-based whole life insurance. Unfortunately, many (if not most) people still aren’t up to speed on the alternatives which have become available over the past 25 years (e.g. cheap online trading platforms and digital asset management services).

Many people simply do not understand how easy investing directly in ETFs can be. If you have the time, maybe show your friend how it works. He might be surprised at how simple it is. If he really isn’t into it, then paying say 0.5% more for a cheap online asset management service is another option. More expensive, but still much cheaper than what he’s paying for his current service, and probably even less involvement required on his part.

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Absolutely! I think I was a little overeager in my description in the original post. I know the deceased, he was a phenomenally smart man, but he didn’t grow up in this day and age where we have so many options to self manage our things. They did what was asked of them, and they made a profit, so in the end, they’ve done a good job.

I wish I was still able to edit my original post, but alas I can’t.

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He’s very interested.

But then again, I can’t fault him for liking the dividends coming from basically “free money”. It’s more or less his families monthly salary one more time coming from something he had no hand in and didn’t have to work for, if that makes sense. Investing the same sum in VT won’t yield quite the same dividends. I’m thinking about showing him the option of iShares Swiss Dividend ETF (CH) - CHDVD which would similar dividends and would be more diversified but I’m not that convincing since I don’t believe in limiting a portfolio to just Switzerland.

My idea for his money (that sounds dumb :smiley:) would be to lump sum some of it, use other parts for his business, pension fund, 3a and life and DCA the rest. I think an independent advisor would be better for that though, so I suggested that.

I honestly don’t know if I’d lump sum all of it in VT or some other diversified ETF. if it was my money even though I think it would be the smartest.

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Anecdotally, I’ve heard this from several professional asset managers who mainly (99%) invest money for institutional investors but who offer private money management for “friends and family”: some prospective private clients would hear the professional’s advice on custom portfolio construction (typically a mix of low fee ETFs and/or mutual funds tailored to the client’s needs), but would then insist on adding this stock to the mix, and excluding that stock from the proposed ETF, and discussing (as a layperson really) the benefits of such a, shall we say, Frankenstein portfolio.
All of those professional money managers I have heard this from politely decline managing assets for such “active” private clients as it goes against their professional … pride?
A private banker though will happily accommodate any strategy the client prefers and will at best act as a rail guard for really stupid things the client might want to implement. The private banker isn’t a bad person, they are just accommodating what the client wants.

Anyhow, as @Cortana expressed so eloquently some people will do better this way (even with high fees) than managing the money entirely themselves and e.g. selling at the worst time when panic sinks in for them. The private banker will then at least tell the client that they should sit through this, and hopefully they’re successful. Maybe that alone is worth the high fee for someone who hasn’t got the financial background and the guts to navigate the markets.

No offense taken.

Comparing yearly returns would be adequate if all investments (and potential withdrawals) took place on January 1 (or thereabouts). The total return and the TWR for that year would then match mostly.*
If investments (or withdrawals) took place throughout the year, then you’d need to compare the aggregated total return and the aggregated TWR on a more granular basis. Most funds do this on a monthly basis, but you can go as granular as daily.

At the risk of boring you, comparing a portfolio tailored for high distributions to a total return index only partially makes sense given the way you describe the deceased’s desire for choosing stocks and an apparent preference of high steady and regular distributions (possibly with less volatiliy) over total return of an index.

* The different cash flows from an index fund and the relatively high distribution portfolio discussed here would still make some minor differences.

Hey, wow, what a coincidence, I happen to offer this for a very small fee …

Just kidding.

I would look for someone who does this on Honorarbasis.

The somewhat radical view by finpension claims that there is no independent financial advice (see their post here), but their alternative is that the investor educate themselves – which is not feasible for some people for whatever reason ever.

I hesitate to post the name of the Honorarberater that I used, not because I didn’t like them, but because I don’t want to endorse anyone with my name. If you insist, DM me and I’ll send you a name.

Be prepared to pay up – they are independent for a reason and do have to finance themselves without getting kickbacks from the funds/ETFs they recommend or the bank they will propose for accounts and custody of your assets.

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As a private client advisor I experienced that quite a lot. Especially during the Corona crash. From the ~250 clients with invested assets, ~50 called or requested an appointment to discuss the situation in March/April 2020. More than half of them were in the mindset or already decided to sell everything. I was able to prevent most planned sells. Used a lot of graphs, historic data etc. to convince them to stay invested and see the bigger picture. If I remember correctly, only 3 couldn‘t take it anymore. And I‘m glad it turned out that way. Not only for the sake of my annual performance and the bank itself, but for the clients too.

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