MF Global Trustees fighting over customer funds

This pathetic spat between the US and British trustees in charge of administering the MF Global bankruptcy demonstrates that even the seemingly simple procedure of segregating customer funds poses a tremendous challenge for management, auditors and regulators. If you take money from Uncle Bill, to make an example that even these 'experts' can understand, and put it into an account you open in the name of XXX favor Uncle Bill it should be obvious for anyone who the money belongs to. Otherwise it must be apparent that all parties involved pay not the blindest bit of interest to the protection of investors.

Dangerous Swiss Cheese

Swiss authorities and banks have thoroughly capitulated in their battle to preserve the interests of their banking clients. In an age where the appetite of politicians and pressure groups to lay their hands to the citizen's savings seems to know no boundaries it was maybe too much to ask for a more resolute defense of citizen's rights for privacy. All the countries that want a piece of the action - and Pakistan of all countries is the latest arrival - and claim their share of the funds their citizens have entrusted to the once safe haven of Switzerland - had it in their remit to construct a wall around their countries and prevent citizens from sending their money abroad. That way it would have become obvious what their understanding of civil liberties really was. The much larger danger lurking ahead is an even larger crisis engulfing the Eurozone and its banks and the risk that this would lead to capital controls and even confiscation of all savings and investments in a desperate attempt to shore up tottering welfare states. We can only advice all readers to diversify their asset in terms of geographical location and asset classes. Transactions that leave an audit trail should be kept to an absolute minimum.

Do not put to much trust into Pension Plans

News that another EU member state has expropriated some pension fund assets in order to pay for irresponsible state expenditures should be a warning sign for savers. We suggest that tax-enhanced saving in pension plans is only undertaken after careful consideration. Legislation can be changed at the stroke of a pen, is not subject to proper democratic supervision and leaves the saver open to arbitrary decisions by politicians.

FT Investor Dashboard

This table gives a quick overview of major risk factors affecting the possible performance of an investor's portfolio. It contains some interesting information but the main problem the average investor faces is not really addressed. Unless someone wants to be his own hedge fund manager he or she relies on the advice and performance produced by whoever manages the portfolio(s). Therefore it is past and future performance data that alone is relevant for someone's financial situation. While the value of past performance may be subject to dispute it is the only hard evidence and investor has at his disposal when choosing an investment adviser.

Should you stay or quit when your Fund Manager changes jobs?

http://www.cnbc.com//id/45357256

Trading Derivatives? - READ THIS FIRST!

For the moment we advise all readers to stop trading in US futures markets. The regulatory regime has become so uncertain, is riddled with perverse side-effects and is rigged to the disadvantage of honest participants that the only logical conclusion can be to avoid any active involvement. Bankruptcies are administered by extremely expensive agents that are under little or no supervision and appointed by a bureaucracy that is dominated by insiders or political appointees that are incompetent. Anyone who is surprised by our strong recommendation should read this.

MF Global: How to get rich from bankruptcy

The trustee that oversees the liquidation of MF Global is charging $891 against the assets of the failed broker while customers have to wait for news about when and how much of their money will be returned to them. Confidence in paper assets will be damaged by this regulatory failure and demand for real assets such as precious metals and property can only be increased.

Regulators are no guarantee

Most Financial Markets these days suffer from a severe dose of over-regulation. But it is in many cases the wrong sort of regulation. Agencies and financial firms are stuffed full with box-ticking bureaucrats but they are quite useless in spotting accidents before they happen. The recent case of the MF Global bankruptcy illustrates that too many regulators can leave serious gaps in the safety belt that is supposed to protect investors from fraud and malpractice. A mature financial market such as the USA still has not been able to construct a fail-safe system of investor protection and the preoccuption of the presidential hopefuls - war and tax cuts - gives little hope that there will be an improvement soon.

Thinking of buying 'Structured Products'?

If you are thinking of buying a so-called 'structured' investment product you could do worse than having a look at this court judgement. It deals with the case of a rich individual and his experience with 'barrier' notes or 'reverse' convertible notes that he bought from one of the major providers of private banking services. Readers should remember that there is no free lunch in the investment world. If they are not able to dissect the intricate mathematics behind the construction of such investment vehicles they are at a disadvantage vis-a-vis the providers and their salesmen. Even the experts often disagree about the correct valuation of the options that are packaged deep inside and as a consequence a lay investor stands no chance to value such securities correctly or - even more importantly - assess the inherent risk that he is asked to assume.

10 commandments for protecting clients

A banker from Switzerland's Baumann & Cie has published an admirable list of ten commandments (in German) that a client advisor should adhere to in order to put the client's interests above any internal pressure to generating fees. These ten commandments are admirable as a declaration of intent. But how can a client be sure that they are adhered to? Trust is good but control is better and an independent advisor will make sure that this checklist (and additional precautions regarding risk, performance measurement and fees) is followed.

How safe is your money?

We are here not talking about how your investments do but whether or not your investments, your money, are still safe in an account where they are supposed to be. Very few readers will store their fungible wealth at home, in a safe or buried in the back garden. While property should be reasonably safe - at least until governments confiscate it or tax it away - most other assets are nothing else but book entries in some computer and linked to an account with a bank, insurance company, investment fund or asset manager. News that one of the major exchanges did not detect that the regulations about segregation of customer assets were not followed by MF Global is a warning sign. Investors must not be seduced by posh offices, glossy marketing brochures or gregarious personalities into neglecting the more boring - but essential - aspects of money management.

Highest Income Tax Rates Worldwide - KPMG Study

A handy reckoner for those interested to move to a tax-friendly climate can be found here

Is Switzerland a safe place for your Money?

Recent reports about Swiss financial institutions refusing cash disbursements when clients demand them cast a very long shadow on Switzerland as a safe location for investors that traditionally have seen it as a bulwark against authorities in their native countries. We leave it to our readers to work their way through the various agreements between Switzerland and other countries (see for example the agreement with Germany) but the fact is that these are rubber paragraphs where the interests of the investors are right at the bottom of priorities and the interest of an overbearing state is right at the top. We would add that a perusal of the 'interpretation' by the Swiss Banker's Association or a 'position paper' issued by the Financial Regulator does not inspire more confidence either.

Slippery Slope to expropriation?

Reports that authorities in certain countries have begun to limit or control the purchase and sale of gold indicate that the political kleptocracies ruling in most countries will stop at nothing to keep their wasteful spending policies going. As always, the lame excuse of combatting money laundering provides a convenient fig leaf - when the whole world knows that ill-advised government policies are the real cause of most - if not all - major crimes.

Who shall teach your kids the facts about (financial) life?

Providers of Financial Advice are falling over themselves to teach the kids of rich families how to handle their affairs when they are faced with the challenge of managing substantial businesses and supervising the investment of substantial family fortunes. We would caution against entrusting banks and money managers with this educational task and advise families to find providers without an obvious conflict of interest.

Professors and Stock Markets don't mix

The (securely tenured) economist Robert Shiller seems to need some help in understanding stock market movements. In the New York Times he tries to explain the recent stock market volatility. But if he - or anyone else - thinks that this volatility was anything particularly exceptional he should just have a look back and he will find that the Cuban Missile Crisis of President Kennedy's stand-off with the Steel Industry in the early sixties also caused sharp sell-offs in the stock market. In the big picture a drop of 15 or even 20 per cent is nothing out of the ordinary. Any investor worth his salt knows that markets tend to decline more rapidly than they rise and if anything should be glad that he is offered the opportunity to acquire shares at much reduced prices.

Safest Asset in the World?

The well-known economist Robert Shiller claims that his number one investment recommendation would be inflation-protected treasury securities (TIPS as they are usually called in the US). We beg to differ as he implies that there is no risk of government meddling with inflation statistics - or worse, the wholesale repudiation of the promise to link interest payment and principal to the value of the currency. In light of recent econonmic developments in many major economies we suggest that blind trust in the honesty of politicians is untimely.

Bond Funds - are they worth the fees they charge?

You certainly do not need an investment manager to hold your assets in cash, but should you pay a fund manager to manage your bond investments? and if yes, how high should the fees be that you pay for looking after this asset class.
An interesting article reviews this problem but we would rather have the investor focus on the fact that the selection of the right asset class (cash, bonds, stocks, currencies and possibly commodities, not to mention property or direct investments) is the main driver of long-term investment success.
Tinkering with the selection of assets within each asset class is an important challenge but should always play second fiddle to the selection of the right asset mix.

Private Bankers providing Philanhropy advice?

News that a large private banking firm hired another employee to offer its customers 'bespoke' advice on philanthropy. Readers are advised to be on the look-out for unintended side-effects of this seemingly altruistic concern with good causes. It is never a good idea to mix different motives when shopping for any product. Nobody goes to the local supermarket and expects to be offered advice on philanthropy. It also was always a strange notion that private bankers should offer to walk a client's dog as one would think that clients would be rich enough to arrange their non-financial affairs without the help of a financial advisor. When the private banking industry is under intense competitive and cost pressure the hiring of philanthropy advisors should be a luxury they firms should be able to do without. Clients are advised to make sure that the philanthropy is not meant to ultimately be a marketing ruse that benefits the advisor more than any good causes.

Are the regulators completely out of control?

We would love to hear from any real end investor private saver who thinks he is (1) able to explain what the various versions of UCITS investment regulations mean or (2) what benefit he has personally derived from this legislation. We suspect it is easier to win the Euromillions lottery than to find this person, especially as we just notice that the 'legislators' in the various European capitals - and in particular the pampered species in Brussels - are already beavering away at drawing up plans for UCITS version number 5 (when even market professionals have difficulty understanding, let alone implementing version number 4). All this nonsense means that costs will be piled on costs and the hapless investor must be even more careful when deciding how to invest his precious nestegg.

FATCA - The road to serfdom is well travelled

The absurd legislation making its way through the US government machine is a sad indictment for the inability of the European 'elites' to make a clear and determined stand in defending the interests of their citizens and the financial industry in the Continent. A simple threat to retaliate tit for tat and subject the US institutions to the same treatment would have stopped the whole nonsense right in its tracks. After all, if the US is so keen to catch potential tax cheats it could impose stringent controls on its own citizens, control all movements of money in and out of the country and in the process make a laughing stock of the expression 'land of the free'.

Who is fighting your corner and watching out for possible fraud

A case brought against a prominent investment firm illustrates that investors need expert advice when faced with sophisticated money managers that may well have an information advantage and better knowledge of the investment products.

What is a 'best' wealth management house?

When a financial magazine declares that such and such bank is the 'best wealth management house' it would be useful if the rating would mean that the investment management firm also provides the best investment returns for its clients.

Don't rely on arbitration when you feel cheated

US Regulators may not allow evidence from other arbitration cases (NY Times)

Fund investors given short shrift by US Supreme Court

A recent judgement by the US Supreme Court relies on hair-splitting as it declares that the management company of a mutual fund cannot be sued by investors that are misled by a prospectus that is issued by a managed by the company. As a consequence investors cannot get any compensation from the people that are actually behind the misleading information. While this case is a purely US case it is representative for the cavalier attitude that investors are treated by regulators, courts and governments in most jurisdictions.

Do-good politicians want a third bite off your money

Not enough that income from employment is often taxed higher than income from (often inherited) wealth and that returns on savings are taxed again, now the Nomenklatura that runs our governments - and especially the pointless Eurocracy - wants to 'direct' your investments into 'socially-desirable' activities as it becomes more and more difficult to raise the 'yield' from ever-increasing taxation to finance the ambitious goals of the do-gooders. Investment strategy has to be carefully planned to prevent the fall-out from these schemes.

Do Earnings forecasts matter?

An interesting couple of charts on Ed Yardeni's blog illustrates the near-permanent bias towards overestimating the future earnings growth of S&P 500 companies. Especially at the beginning of each year estimates are over-optimistic and they are reduced during the course of the year.

Does your adviser take secret commission payments?

One of the leading platforms for investment fund sales in the UK refuses to disclose commission payments to funds it sells through its platform (Daily Mail)

Ireland raids pension savings again

Who in his right mind would want to entrust his retirement savings to governments? The Irish government wants to use the money to fund a job creation scheme - given the track record of such schemes the money is a much as gone in our opinion.

Lack of transparency in wealth management fees and performance

Wealth managers have long been stingy about publicly disclosing data on fees and the performance of standard portfolios READ MORE

Are you protected against fraudulent investment advisers?

A report about the loss of Sfr 20 million that has been uncovered in the private banking department at UBS highlights the need to carefully select and monitor investment advisers. In this particular case a senior adviser to very high net Spanish clients had caused the misappropriation and the bank had to reimburse them. So one could say that it pays to entrust only very large and financially strong institutions with the management of one's investments. But there is another way and it means that independent or smaller money managers can well be entrusted with the direction of the investment but that the safekeeping of the securities and funds should be handled at arms-length by an independent and secure custodian.

How to monitor your 'execution'

While the executions we have in mind are less blood-curdling than the one you might see in your typical Horror Movie they are of critical importance for you financial well-being. We are talking about how well your orders to deal in shares, bonds or foreign exchange are handled by your broker or financial adviser. Any amount of 'slippage' - even if not due to malice - is a drag on the performance of your portfolio. The more often you turn over your investments the more importance is careful monitoring of execution costs. The lackadaisical regulation of 'dark pools', 'high-frequency trading' and 'predatory algos' have made it more difficult - but even more important - to keep a close watch on executions.

Growthbuilder - but is it building your wealth?

A new structured product has just been launched in the UK and it carries the promising name 'Growthbuilder'. But before you rush to sign on the dotted line potential investors should ask themselves if they understand the complicated option strategies that are packaged into this product. Only then they could be assured that they buy the product at a fair price and are not charged excessive mark-ups by the vendor. And even if they - or their unbiased advisor (who has no financial interest in the sale of the structure) - can understand the sophisticated mathematical models it does not mean that an investment should be made. All option strategies suffer from the defect that investors have to be extremely accurate in their timing - in addition to the already difficult task of choosing the right investment in the first place. The Libyan Investment Authority found that out to its not inconsiderable cost (which in its case surpassed the billion dollar mark quite comfortably). Dealing with sophisticated investment professionals that are incentivised by commission payments should only be undertaken with extreme care and 'Buyer beware' should be foremost on any investor's mind.

Libyan Investment Authority - How not to structure a portfolio

This revealing snapshot demonstrates that all investors - however (un)sophisticated they may be - should pay more attention to the importance of designing a portfolio that is consistent and not just a random collection of holdings that are the result of uncoordinated input received from news or financial product salespeople. Any investor employing more than one money manager has the problem that he may harbour holdings that are in essence based on contradictory assumptions and therefore expensive and inefficient. At the same time the Libyan holdings also underline the riskiness of 'structured investments' that are at best only understood by those who sell them (and sometimes not even by these mathematical wizards themselves). Anyone without a PhD in Mathematics would do well to give these 'structures' a wide berth.

Media and misinformation in the markets

How to deal with information overflow in the investment world - By Robert Shiller

Today's War: Savers versus Speculators

When the manager of the world's largest bond fund says that people are facing 'financial repression' it highlights the battle between the ordinary citizen-savers and the speculators who caused a near-collapse of the financial system and the ensuing artificial depression of real interest rates. Despite this deplorable consequence of poor financial regulation investors should not be tempted into risky investments in order to make up for the low interest rates they receive at the moment. While a return of 1 percent a year may be hurting in the pocket it is nothing compared to a much larger loss in ill-conceived gamble in speculative shares or 'investment products' marketed by aggressive salesmen that are only out to cash in on fat sales commissions. It would take years to make of for a loss of only 10 percent of principal and the risk for much higher losses cannot be excluded.

Trust is good, control is better

Slippage in its most basic form means the difference between the expected price of a trade, and the price the trade actually executes at. This can be due to fast moving markets and is caused by the delay between the placing of an order and the time it reaches the market. Slippage can also be due to mishandling or even abuse by the broker that is entrusted with executing the order. So investors should regularly scrutinise the handling and execution of their investment transactions. An ongoing controversy between major participants in the financial markets illustrates that not even sophisticated investors are immune from becoming victims of poor order handling.

Nine out of ten clients get bad advice

While a survey conducted by a consumer organisation in Germany may at first appear to be of little relevance on a wider global scale it offers a useful insight into problems faced by clients of banks, investment advisers and insurance companies. They are usually at an information disadvantage compared to their adviser/salesperson and we suspect that a survey conducted on a more international basis would produce similar results. Getting advice that is not influenced by any monetary incentive such as commissions, transaction fees etc is more important as products continuously become more complex and more difficult to analyse for the laymen - including businesspeople who may be used to dealing with sophisticated financial product in their 'day job' running often quite substantial businesses.

How safe are state pensions?

Ireland and Argentina are two examples of a new trend where governments that have run out of ideas how to finance their uncontrolled spending will treat money that is supposed to pay for citizens that retire. They blatantly steal from present and future pensioners that rely on a secure retirement after having believed the promises of politicians for most of their lives. Locking up investments in saving schemes that are ultimately controlled by greedy and unaccountable politicians may not be a good idea despite the carrot of tax incentives dangled by governments and providers of pension schemes.

'Rent-a-President' - with your money!

A report that ex-Presidents George W. Bush and Bill Clinton attended a closely-guarded meeting for private clients of a major wealth management bank demonstrates that investors should closely scrutinise the fees they pay to their financial advisers. One may or may not have a view on the policies of these ex-politicians but it is difficult to see what they can add to the performance of the client portfolios supervised by the bank. There may be a certain entertainment value but as we have never seen proof that either Bush Jr. or Clinton possess outstanding investment acumen.

Bonds- Certificates of Confiscation again?

A controversy about the value of bonds as investment vehicles between respected investors highlights the risks investors face when locking in today's record low interest rates. Even if one can make some adjustment for the likely returns one still has to account for the negative impact of inflation and income tax as well as the fees charged by investment managers or mutual funds.

Synthetic ETF's - Do they pose a risk? and for whom?

Discussion about the potential risks that may or may not be created for global financial markets by the proliferation of increasingly complicated Exchange Traded Funds (ETF's) that rely on derivatives to achieve their investment objective also highlights the fact that the ETF investors on their part may also be unaware of risks that synthetic ETF structures may pose for their financial security. While ETF's were initially viewed as a simple method to achieve performance targets at little cost and with little risk they turn more and more into instruments that can only be properly scrutinised by experienced investment professionals. Investors should not rely on glossy marketing brochures and sales patter by advisers who are trying to promote the funds.

Hedge Fund-lite UCITS Fund Warning

The bureaucrats trying to protect the investing public from costly failures in the fund management industry may have good intentions but the outcome of their deliberations more often than not adds additional complexity to the rules governing the investment industry. When seasoned industry figures warn of potential blow-ups of certain types of UCITS-III complaint 'hedge fund-lite' vehicles the investment public - whether it is ordinary investors or 'sophisticated' investors - should wake up to the fact that it would do well to consult unbiased advisers before committing their funds to any investment product.

Germany: last vestiges of individual freedom supressed

One should have thought that the political and bureaucratic establishment that holds Germany in an iron grip should at least have learned the lessons of history after decades under national-socialist or communist totalitarian regimes. But quite the contrary is happening. The tendency to control everything that the citizen does is so ingrained in the national psyche that the state has no problem extending its reach into ever-more absurd niches of the citizen's lives. Now a new law is proposed that would have banks automatically document the content of safe-keeping boxes that are rented out. In addition these reports would have to be passed on to the 'authorities'. This ludicrous encroachment into individual freedom is just in addition to supervision of all bank accounts, courier services (!), telecommunication and postal services as well as transportation companies. In addition the state's functionaries would not need prior agreement from any court to obtain their information. Citizen-Investors need to be more vigilant than ever to protect their assets from an all-devouring state that exists only to divert their assets to pet projects favoured by politicians and those well-connected to them.

How to make money from Hedge Funds

This brief article will pour cold water over the shoulders of any investor who hands money to hedge funds charging a '2+20' percent fee without doing extensive due diligence. Maybe the numbers are not mathematically precise but the general drift of the conclusion in the article should be evident: Otherwise an investor would be better off to manage and/or sell a hedge fund or provide them with accomodation in Greenwich/Ct (or London's West End). One should not forget that 2+20 is not the only cost many investors (certainly most private investors) face as there will be additional fees for those in private banking departments or fund of fund managers helping to select the (hopefully) winning funds.

Hedge Fund - no longer an elite business

Says Michael Steinhardt - and he should know. Investors must analyse hedge fund offerings more carefully than ever given the thousands of funds that are on the market now.

Investment Fund Performance - More than meets the Eye

If you thought that the problem of selecting the right investment fund from among the thousands on offer should not be all that difficult you may well have a look at this article. The investment management industry may find it profitable to segment its product offerings into more and more specialised offerings but that makes it more and more difficult for the investor to find the right fund. There are more investment funds out there than there are publicly listed shares and when one adds all the 'structured' investment products the list only gets longer.

Danger of being short volatility

I usually try to avoid investment jargon and warn clients to be suspicious when they are bombarded with exotic terms that require at the very minimum an advanced degree in mathematics in order to be understood. I use the term 'being short volatility' in order to send a wake-up call to readers. In the ordinary course of investment it is recommended not to write naked options as the investor is exposed to an open-ended risk. Sometimes these option exposures are cleverly packaged (hidden?) in complicated structures that look perfectly innocent to the naked eye.

UCITS IV - is your money now really safe?

The regulatory machine is (as always) running overtime but the outcome is not always proportional to the effort. After UCITS I, II and III regulators are already putting the finishing touches on the next (but surely not last) version of the framework for investment funds in Europe. When a commentator writes that 'EU laws impose no ficuiary duties on boards of directors and the definition of their role is again left at the discretion of country regulators' (Samuel Sender, FTfm, 28 March 2011) one can have but little confidence in the outcome of the deliberations of the regulators.

And you thought you owned that Silver?

A new court case in the USA highlights the risks of leaving your holdings of physical precious metals such as Silver or Gold with a bank. That the belief that one owns 'hard' assets is naive to say the least is proven by the fact that often all that you really own is a claim on a bank. Should that institution get into trouble you are only the owner of a claim on that bank and have to joins the queue of creditors. In all likelihood you would at best receive a fraction of the worth of your holdings in the eventual settlement of the bankruptcy.

Leave Derivative Esoterics to the Specialists

An article in a Swiss financial newspaper that is also widely read by more or less sophisticated private investors recently carried an article explaining how to use the 'Barrier Hit Probability' when evaluating a certain type of structured derivative product (often known as Warrant or 'Certificate'). We advise all but the most enterprising investors not only to not burden themselves with the details of such products but to stay away from any investment in them (or advisers that try to put their money into such products). Not even the experts agree on how to value these products and the underlying assumptions are so difficult to predict that the results are only giving a false sense of security.

So you thought your Gold is safe?

The growing interest in gold as a safe haven in a time characterised by growing attacks on private savers leads many to seek refuge in the ultimate store of value. But beware! Gold that is stored in a bank vault you are not allowed to access by government decree or because the bank has gone bankrupt is of little use - and that would happen at exactly the moment when you would need it most to tide you over some difficult times. The same can be said for the fashionable ETF's that are being created by financial alchemists at a rapid clip as they ultimately are nothing but electronic impulses residing in some remote computer (and we don't even consider the risk of cyber terrorism or war). We think that Gold is best held in the shape of small denomination gold coins. When the going gets tough and you would like to buy some food or bribe your way to freedom a regular 400 oz gold bar would be of little use. Much better to stash away half ounce or one ounce Krugerrands or even the now quite popular mini bars that may be even more fungible.

Advice or Production? - How much does your Adviser earn

Interesting insight into the financial rewards your adviser may earn for his 'production'. Yes, you are not a client but a cash-cow for your adviser and his employers so the old adage should be remembered: Buyer beware! Any investor must know how to make sure that the safety and performance of his investments rank foremost in the mind of his investment advisers.

Swatch may sue UBS for mis-selling 'absolute return product'

There is a natural conflict between every Financial Service Provider and Investor/Client. No amount of regulation will be able to overcome this problem. If someone sells you some apples on the market the same problem exists. So the watchword has to be: Buyer Beware! Fee-based advisors like Private Banking Advisory can help to mediate between the opposing parties to any transaction. High moral values can alleviate the problem but no one should rely on that alone. Maybe Swatch should have stuck to its knitting and focused on making good watches?

High fees hamper traget-date funds

The importance of keeping a close watch on fees that are paid for investment advice is illustrated by the latest controversy about the idea of so-called 'target date' funds. These funds invest in a mix of stocks and bonds that grows steadily more conservative as investors' retirement—or "target"—date approaches. But while this structure is supposed to help investors saving for their retirement it creates additional pitfalls on the already stony road to build a retirement pot that is sufficiently large to cover the needs of a rapidly-aging population.

Hedge Fund Manager accused by SEC

Florian Homm, once a high-flying hedge fund manager in Germany, is accused by the SEC of having manipulated share prices. A prominent German news magazine claims that losses of up to US$ 200 million remain unexplained. Good looks and a good talk should never be the basis for entrusting one's hard-earned money to an investment manager.

IMF proposes new 'virtual currency'

Investors should be prepared for the next global conspiracy of the 'global elites' that is intended to confiscate their assets. Recently the IMF proposed a significant expansion of the SDR scheme. At a time when the world drowns in liquidity this is the last thing that anyone interested in stable currency value would wish for.

Gold purchasers to be registered - first step to expropriation?

If you have still any trust in governments then think again and read this article

How not to rank financial advisers

A survey in Barron's Magazine ranks the top US financial advisers. Assets under management are the first - and we presume most important - measure mentioned in the article. At Private Banking Advisory we would rate the Financial Advisers according to performance first, second and third. It is a tragedy for investors that assets under management seem to be the most important criteria in this 'survey'. The importance of independent and unbiased advice regarding performance, risk and costs are strikingly illustrated by this approach

Bundesbank loses last sensible bullwark against Inflationists

Axel Weber's resignation from the top of the German Bundesbank leaves the world adrift in a sea of paper money that irresponsible politicians and their puppets at the helm of the main central banks use to paper over the cracks of their incompetent economic policies. Gold, Silver and other hard assets may have reached record highs but given this sad political backdrop a change in flight to safety is not in sight.

Is Gold a Hedge against Inflation?

I notice today that in an interview an asset manager stated that Gold was not suitable as a hedge against inflation. The manager - let him remain unnamed - picked the year 1980 when Gold reached a temporary all-time high of more than $US 800 as the base period and claimed that in real terms even Gold at its current price of around $ 1350 has not held its ground against inflation. But you can prove anything with statistics. If the comparison were made with the price of $US 35 on which the price was fixed by the US Government until the early 1970s the comparison would be very different. A look back to 1792 shows that gold more than held its own in real terms since then.

Gold: the safest asset

The hectic search for the presumed wealth that Egypt's former President Hosni Mubarak is supposed to have stashed away highlights the importance of not only putting some assets into safe havens but also to select the right asset. Assets that are claims or liabilities on other countries or are stored electronically cannot be considered safe under all conceivable circumstances. While we have sympathy for the quest for Mubaraks assets it leaves a sour taste as no proper legal procedure seems to have been followed. Authorities in some countries seem to be driven by political correctness and it is obvious that they will be the willing executioners if other countries want to bring assets of their citizens under control. Gold is one asset that will be very difficult to trace. Its compactness means that is requires little storage space, it is neither an asset nor a liability and given proper attention can easily be stored in a safe place.

Capital Controls coming to the US?

We are not yet in the camp of the panic mongers who frighten Americans but we are continuously advising investors to make sure that they don't put all their investment apples into the same basket. Keep a fair share of your wealth beyond the reach of local politicians and tax authorities. Then you will be prepared to most eventualities.

Diversify your assets - also geographically!

The history of the past 100 plus years has provided ample illustration for the fact that even the mightiest empires may fall. So any investor is well advised to plan for the worst case scenario - however unlikely it may appear at the moment. The costs of doing so are very moderate in comparison with the potential gain: to have a nest egg to fall back on if one has to leave one's country because of political turmoil. As geographical diversification of assets provides a benefit in any case the investor in effect is incentivised to put some - or the larger part - of his assets beyond the reach of the authorities in his homeland.

UCITS III Hedge Funds - don't be blinded by the label

Ordinary investors already have enough trouble understanding what hedge funds do, how they are structured and what risks they face when investing in them. So the well-meaning improvement in transparency that regulators and their political pay-masters have intended by releasing the new UCITS III regulations may well be lost on ordinary mortals. But the danger is that a new label can blind investors to the still substantial risks hidden in hedge fund structures as these funds are more lightly regulated than ordinary investment funds. The recommendation by market insiders that investors just have to be more careful and do more analysis of risks is missing the point as the recipients of the advice are simply not able to do this sort of analysis. Using advisers instead just means pushing the can down the road as one risk is substituted by another one: now the investor is supposed to know which adviser to select and basically to put his trust in him and hope for the best.

Investors awake and look after your interests!

'Price competition is largely absent from the (retail) financial services sector' writes Pauline Skypala, Editor of the FTfm Magazine (31 Jan 2011). She blames information asymmetry and lack of consumer engagement for this state of affairs. While we cannot expect all investors to attend university and learn about the most recent financial product innovations they can try to find outside help to defend their interests when dealing with financial advisers. High fees - not to mention risky investment strategies - present a serious drag on investment performance that can be reduced - if not eliminated - by careful analysis of fees, investment risk and performance statistics.

ETF transparency could be better

'Pressure growing for greater transparency' reads a headline in the Financial Times (7 Feb 2011). What is particularly worrying - among some other aspects - is that ETFs are not bound by trading rules that apply to single shares. Neither completed trades nor bid-offer prices have to be reported and investors are to a certain amount kept at a disadvantage vis-a-vis the market makers. As a consequence extra care has to be taken when dealing in ETFs.

Swaps pose new risk for your investment funds

Just when Private Investors would have hoped that a new, more rigorous regulatory regime would protect their assets from careless oversight - or outright fraud - the growing use of swaps by investment managers poses a new risk for the safety of investments. Most Private Investors - and many investment professionals and finance managers - have only the haziest of notions when it comes to the intricacies of swaps (and many other derivatives or 'structured' products) and therefore investors are well advised to obtain help when selecting suitable investment products.

Which 'Passport' does your Fund carry?

A recent headline suggests that 'Dublin finds hedge fund favour'. (Financial Times, 17 Jan 2011). This aroused my interest as Ireland at present is in the eye of the ongoing banking storm. Proposed EU legislation currently under (endless) discussion will require that alternative investment funds are domiciled inside an EU member state. This is supposed to make it safer for investors to entrust their savings to hedge funds, private equity and other 'alternative' investment funds. But one has to wonder what would really change if a fund is domiciled in one of the smaller EU member states like Ireland, Luxembourg - or even Latvia or Malta. Would investors really be as well protected as in a major country like Britain, France or Germany? What resources do smaller countries have devoted to the supervision of investment funds? Ireland is now home to around 650 hedge funds, tendency rising. What guarantee do investors have if there is a major accident such as the Madoff Scandal where billions of dollars have been squirrelled away by fraudsters under the eye of the regulators? Can investors expect to be made good by the authorities in these countries? Do the regulations even pretend to offer a money-back guarantee in case of fraud or are they just a way for politicians to score cheap points with the electorate and create even more pointless paperwork for businesses?

Media Pundits: Enjoy Experts with Care

The proliferation of news outlets that operate 24 hours a day has led to the need to fill the airspace with constant comment on all markets. Investors should be careful not to confuse the permanent noise on the airwaves and the internet with advice. By all means, enjoy the entertainment and sometimes you may also find a new and useful insight that you can incorporate into your investment analysis. But be aware that the track record of most 'experts' is often less than transparent. Who really knows how the recommendations of the past have performed? Who is being warned when the expert changes his view or adjusts his own personal positions? Nouriel Roubini, Jim Cramer or Mark Faber may talk a good talk but it is not easy - or possible at all - to monitor their track record and when they change their view you may be the last person to hear about it.

'Quant' Investing not without pitfalls

A unit of French insurer AXA agreed to pay $242 million to settle fraud accusations by the SEC that it hid from clients a serious software glitch in a quantitative investment model (Wall Street Journal, 4 Feb 2011)

Are you watching your 'executions'?

No, we are not talking about people being shot, but in this context one could say that investors might get executed, not literally of course, but in the sense that the size of their portfolios gets 'executed'. A lawsuit filed against a prominent investment management firm in the United States illustrates that investors have to be on their guard and carefully monitor not only the investment allocations made by their advisers but also the way that the investments are implemented. The expenses connected with 'executing' investments can be a serious drag on investment performance - even if all deals are above board.

Should you listen to Investment Research

The fate of a brave and insightful bank analyst who correctly predicted the problems of the Irish banking industry should be a warning sign for any investor who puts his faith into 'sell side' research. While most analysts are diligent and honest investors should never forget that reports published by stockbrokers are sales documents first, objective analysis second.

Are all private investors idiots?

That seems to be the assumption under which regulators in the EU and FSA publish a raft of consultation documents, guidance notes and draft new laws argues Matthew Vincent in the Financial Times. I would like to add that these diktats lack any democratic legitimacy as they are cooked out by unaccountable technocrats and bureaucrats that are not answerable to the citizens.

Bank Advisers degraded - Study

A study published in Germany states that advisers working for banks have very little ability to perform their fiduciary duties vis-a-vis their clients. They have been degraded to be pure salesmen (or women), every second client contact is expected to lead to a 'sale' and meetings with clients should not last longer than thirty minutes. We can only hope that not all financial institutions adhere to the same school of management but would advise investors to be careful in their contact with financial advisers and take independent advice before entrusting their savings to any provider of asset management services.

Facebook Share Issue: Where are global regulators?

One amazing aspect of the Facebook deal that is promoted by Goldman Sachs is the fact that global regulators seem to be completely absent - despite the fact that possible questions by the SEC in the United States stopped the placement to US domestic investors. Given the noise made by politicians in all civilised financial markets all over the world about the need for more protection of investors and savers this silence is really DEAFENING and shows how much regulators are behind the curve.

Swiss Investment adviser accused of Sfr 34 million fraud

In a Ponzi scheme an investment advisor in Solothurn is accused to have defrauded - mostly German - clients of Sfr 34 million. Prosecutors claim that no funds have ever been invested.

Absolute Return = No Return?

More and more investors are following the siren songs of the asset management industry and put their faith in the rapidly growing offerings of 'absolute return' funds and investment products. Apart from the fact that providers usually charge higher fees for these vehicles investors should also be aware that the word absolute may have a meaning in other connections but when it is used to describe an investment product's properties it can at best be called nebulous. A quick look at the definition of the word demonstrates that the following meanings can be associated with the term: supreme, total, unadulterated etc. All these connotations have a positive tone and as such one can see that the use of the term absolute is nothing but a clever trick devised by marketing departments in order to lull investors into a false sense of security. Absolute return funds are supposed to stand in contrast to relative return funds. The latter are dominating the institutional fund management space where portfolio managers strive simply to outperform their chosen indices on a relative basis. This can lead to the (absurd) situation that managers that simply lose less than their benchmark index are seen as successful and rewarded accordingly. Absolute return funds are supposed to prevent this from happening by aiming to make a positive return in all market situations. But investors should be aware that the emphasis is on the word 'aim'. There is no guarantee that that there will be any positive return at all. Even worse, given the lack of clear index benchmark it is well possible - maybe even likely - that absolute return funds will under perform compared to the main equity and bond indices when market conditions are favorable.

A Slap in the Face - Goldman's Facebook Farce

Don't get too excited when shown the next 'hot' IPO has always been the advice by Private Banking Advisory. Usually the insiders and their commissioned sales agents (aka 'Investment Banks') know more about the business than the great unwashed public (aka 'clients'). Now that potential US investors have learned that they will not be among the 'chosen few' who will be allowed to buy Facebook shares it just added another twist to the sorry tale of problems associated with the handling of Initial Public Offerings.. What may be another sign that the Web 2.0 hype has reached its zenith - or at the very least is close to it - becomes a showpiece of how not to treat your customers. What is also surprising are the fees that Goldman Sachs proposed to charge Facebook investors: It has been reported that Goldman would levy a 4 percent placement fee on clients, plus a half percent “expense reserve” fee. It would also charge a performance-related fee by requiring investors to surrender 5 percent of any profits, known as “carried interest,” according to a Goldman Sachs document. As usual, we could not find any indication about the willingness of the advisor to share in any losses the investors might make.

Do you know how a 'Mezzanine Certificate' functions?

We have to admit that even after 40 years working in the financial markets or with financial instruments we have only the haziest notion of how such an investment instrument is structured. So it is no wonder that a major financial institution is being sued by German investors who have been sold such a product. As always we advise investors to be vigilant and not buy investment products that they do not fully understand.

Alphabet soup with 'certificates'

If anyone wants proof that the proliferation of investment 'certificates', warrants and other structured products has gone too far he only needs to look that Deutsche Bank's website for its x-markets products. I would hazard a guess and estimate that not even 5 per cent of all market professionals in stock exchange departments or investment management firms would be able to understand ALL listed products. Does anyone other than those involved in the manufacturing of these investment vehicles really master all the intricacies of their behaviour? We advise investors to be on the lookout and be vigilant in case their financial advisers try to put such structured investment products into their portfolios.

Don't be hoodwinked by 'Celebrity Ambassadors'

News that former Grand Prix racing driver Niki Lauda has signed on as 'ambassador' for the Money Service Group is another example that investors are given the 'hard sell' by providers of money management services. Money Service Group has given itself an English name but is primarily active in Germany and Switzerland. One wonders what added value a racing driver brings to the party except that maybe some gullible potential or existing investors think that their fee money is well spent and that their investment performance (after deduction of fees of course) will benefit from his investment skills. After all, Lauda received 1.2 million Euro per year from Oerlikon, a previous sponsor who paid for him to wear its name on his head on all public appearances. Potential investors may have a look at the performance of 'Superfund' as Niki Lauda was previously lending his persona to this Hedge Fund provider. That even well-established large Investment Fund groups are not shy when using the popularity of sports personalities has been demonstrated by the use of other sports celebrities such as German football players that lend their image to Banks and Mutual Fund groups.

How safe is your "safe" bond fund?

Not as safe as you may think, or as your financial adviser may promise you. As many investors are hankering for more regular income many bond funds are managed in a way that puts the emphasis on high yields at the cost of adding more risky holdings to the portfolio. And if you have thought that bond fund managers are willing or able to learn from such mistakes then you have another thing coming. What about selling short currencies, buying credit default swaps? On top of these higher-risk strategies investors are expected to pay higher fees - presumably on the pretext that these strategies will be more profitable. But if things go wrong - and they can and will - the only one left with higher - and even guaranteed profits - will be the fund manager while investors are left holding the bag.

Are you left behind in the 'War for Talent'?

Press reports about an escalating 'war for talent' among providers of private banking services should alert investors to the fact that their best interests are not necessarily given priority by financial institutions and their employees. Financial advisers that are tempted to jump ship by ever-rising salaries, sign-on fees and other inducements will have to justify their increased compensation and will be promising the world to their clients in order to transfer their accounts to the new employer. Investors are strongly advised not to let feelings of personal sympathy influence their decisions about where to maintain their account and instead should focus on cold facts such as the stability of the institution they do business with, the performance of their investments (and more importantly: who is actually responsible for investment decisions) as well as the structure of costs and fees.

Why hedge fund performance is under pressure

Herding behavior by managers of hedge funds is just a special case of momentum investing. All market prices deviate from the 'real value' most of the time. The price discovery process at best is a process of approximation to value as new information is disseminated and digested by market participants. Technology and instant communication as well as low dealing costs and the enormous growth in pools of liquid capital exacerbate swings in the market - be they short-term (day trading, high-frequency trading) or longer term. The problem that hedge funds in particular face is that ultimately the only real returns that investments provide are either dividends or coupon payments. The rest of the profits from the investing game is redistributed wealth where one party wins what other market participants lose. This is particularly clear in the case of derivatives (futures, options, swaps etc). Profits from short selling are also always offset by losses on the part of long investors and redistributive by nature. As hedge funds concentrate on these type of redistributive trades they face a particularly strong headwind. The more crowded their space is, the tougher it is for them to create superior performance. This would have to be at the expense of other market participants. A fierce struggle between individual hedge funds to take a share of this diminishing cake can be likened to the fiery fight of a pack of wild animals for their share of prey.

Where is your money slipping into?

An article in Smart Money Magazine asks whether foreign exchange brokers are cheating their clients by using unfair trading practices when executing orders. This could be achieved by taking advantage of small price differences between the time when an order is accepted and when it is executed. The industry term for this is 'slippage' and denotes a practice that prevents a customer from getting a better price than the one promised to him when the order is taken. The difference is pocketed by the broker.
Investors can be deceived whenever they are not careful when monitoring the execution of buy or sell orders in shares, bonds or mutual funds and should take professional advice in order to protect themselves from being taken advantage of.

Hedge Funds return 4.52 % in 2010

Given that low transparency and high fee structures present investors in hedge funds with an uphill struggle this performance is nothing to be proud of. A sometimes high risk profile makes it even more imperative that hedge funds offer a superior investment return to compensate for these drawbacks. Of course, there are exceptional performers, but there will always be some funds that - due to luck or skill - will perform better than the average. Even claims of actual past outperformance have to be taken with a (large) pinch of salt as research shows that a superior performance record can statistically be attributed to skill and not luck only on the basis of a performance history of at least 15 years. PBA advises to follow a well-balanced investment strategy that does not neglect cost and risk at the expense of sometimes elusive performance predictions.