Understand the business model of a bank and an independent asset manager.
Before we start it is important to understand the different business model of banks and independent asset managers, as we are one.
A bank only earns money on the products you are invested in or on the trading by buying and selling commissions. Therefore it is in the banks` interest that you trade often and that you hold products they earn most. If you just hold cash on a bank account the bank earns nothing.
The major scandals of the bank and where they had to pay huge fines where based on that intensive structure. They sold grandmas subprime papers that caused the financial crises in 2007 or they manipulated the exchange rates spread or the LIBOR (risk-free rates).
An independent asset manager charges an annual fee of 0.5 to 1% of your portfolio value. He earns nothing on the products and has, therefore, the intention to pick the ones with the best performance. So he works in your direct interest. The more money you have end of the year, the higher is also his earnings. A real win-win situation.
Your bank or asset manager should define a benchmark for your portfolio and should send you a regular comparison of both. This way you can compare if your bank or asset manager made a good job or not.
Even if a bank defines a clear benchmark you should be careful. One of the most famous benchmarks for US equities is the S&P 500. But there are several versions of it: S&P 500 PR, S&P 500 NR and S&P 500 TR. The PR (price return) version only includes the price of a stock and does not include dividends. The TR version (total return) is including all dividends paid by the stocks and the NR (net return) also includes the dividends but subtract the taxes.
Some asset managers like to use the PR-version to present themselves in a better light. The dividends paid by stocks is shown as their out-performance to the benchmark. You may think that this point is just academically but it can make a huge difference.
Here is the S&P 500 PR (Price index without dividends) compared to the S&P 500(includes dividends and all other payments of companies) over 10 years in USD:
The return of the NR-benchmark over 10 years is 202% but the TR-benchmark is up 284% in the same time.
Overall costs per year
Your bank or asset manager should be able to show you the so-called Total Expense Ratio of the overall portfolio. It includes the management fee but also all hidden costs of the products in your portfolio.
If the value is above 2% you should definitely look for an alternative,
The risk is often not what you own, it is what you don’t own
The bank or asset manager should be able to show in his reporting how the structure of your portfolio looks compared to the benchmark.
Often banks use as worldwide equity benchmark the MSCI World. If you hold just 30% US-Equity in your portfolio that is your greatest risk. The part of US equities in the MSCI World is above 60%. So, if the US equity markets perform much better than all other markets, like in 2020, you run a high risk of under-performance.
You feel much better if you know and understand the strategy of your asset manager and the risks he takes.
Bank earns most with own created products, but not you
Bank XY often has a tendency to only use XY funds and XY structured products. Why? See the box “Understand the business model of a bank and an independent asset manager.”
Many years it was a standard that banks used in their client portfolios the so-called retail class of a mutual fund. The cost of a retail class of an equity fund is about 1.5% a year. An institutional investor pays for the same strategy just 0.7%. The big banks went to the fund companies and asked for a refund for their marketing expenses (in the grocery markets called shelf fee). Often they got 0.7% back and kept the money. This amount was called retrocession.
Based on new laws in Europe each fund must offer a so called “retail without retro class”. This calls often costs about 0.75% per year and the bank is getting no retrocession. A huge number of banks still use the normal retail class instead of the “retail-without-retro” class. Are you sure your bank uses the cheapest possible version for you? We can check that in a free portfolio analysis.
If you have invested EUR 50’000.- in a wrong share class the bank “steals” you EUR 350.- a year. That does not sound a lot but over 5-10 years it can have a big effect on your overall performance.
Extensive use of structured products
Structured products can be a good way to get good risk adjusted return but often they are very expensive. A feature of a structured product is that you pay the major fee in advance. So if you buy a structured product that is lasting 4 years you pay most fee at the start of the running period. A lot of banks has the bad habit to sell the product after 2 years and buy another more promising one.
Why they do that? See the box “Understand the business model of a bank and an independent asset manager.”
Are you not sure your bank treats you fair? Use our free portfolio analysis and we check it for you.
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