The Financial Services Authority is said to be concerned over “poor firm conduct” in private banking and wealth management. The FSA recently conducted a thematic review of the wealth management sector “which revealed evidence of misconduct, giving rise to potential consumer detriment”.
It adds: “In particular, the results indicate that many firms do not gather or maintain adequate client information to demonstrate suitability, and that even where the information is available, there is a significant risk that consumers have unsuitable portfolios.”
At The Whitehall Partnership we believe that, whilst we agree with the FSA’s findings it represents the thin end of the wedge. Apart from failing to keep accurate records, we would question the underlying investment decisions made by some wealth managers and private banks. Indeed we suspect this is at the heart of most financial disasters and complaints made by investors.
There are many private banking and wealth managers responsible for bad advice and some have received heavy fines in the process. Bad advice cost Barclays £7.7million after it failed to warn investors what they were getting into. Between July 2006 and November 2008 Barclays flogged Aviva’s Global Balanced Income Fund and Global Cautious Income Fund to 12,331 people, with investments totalling £692m. Many lost 40% to 50% in the process. Barclays apparently noticed the problem in June 2008, but opted to do nothing about it.
One way or another investors normally end up in funds which are recommended by a independent financial advisor. It is usual for their senior management to decide which funds are included, but the question is how good are those decisions?
Investors should expect wealth managers to develop a sound financial plan which is robust enough to stand the test of time (and the patience of the investor!). But more often, an investor is encouraged towards complex products which offer unrealistic returns at unquantifiable levels of risk.
Clearly there seems to be disharmony between what clients want and what they end up with. This clear lack of understanding extends to the core of wealth management companies. Andrew Fisher, the chief executive of Towry has invested in a tax scheme which is under investigation by HM Revenue & Customs. Mr Fisher said he regrets investing in the scheme and went on to say: “If I had known that the legitimacy of this scheme was going to be questioned, I would not have entered into it”. The big question is what kind of decisions is he making for his clients?
By comparison, we do not recommend complex investment products at The Whitehall Partnership like private equity or things we regard as investment junk. If investments are highly leveraged or difficult to understand, it is because they are probably either too risky or contain hidden charges.
The best way to avoid bad investment decisions is to have a uniform process of making good ones. They should include key indicators of what you want to know before a fund can be regarded as acceptable. Unfortunately, many wealth managers and private banks don’t operate in an open and transparent manner, often not disclosing why a fund manager is selected.
Whatever personal opinions are held by senior management, they should not form part of decision making process for investors. It is investors who need to feel reassured that decisions made for them are made without any vested interest of the people responsible for managing their money. We are very open at The Whitehall Partnership and even publish our process for selecting funds on our website. You can find this by clicking here.