Robo Advisers and Private Bankers - what is in the tin?

The internet has already caused major changes to the business model of several industries - retail, music and travel come to mind. Do-it-yourself investing via online brokers is also growing rapidly.
Now it may be the turn of investment advice for the rich and not-so-rich private investors. Robo Advisers are on the march! They are claiming to offer a cheaper service, and maybe their investment choices are also superior to those made by humans in Private Banks. The history of Robo Advice is not going back long enough so a proper comparison of performance with traditional investment managers is not possible. And simulated historical performance is to be treated with caution. As this article explains, Robo Advice is also fraught with problems but to compare it with personalised advice has to be made by comparing apples with apples. Many providers of Private Banking services claim to offer a tailor-made service (and charge fees accordingly) but the adviser handling the account is often spoon-fed investment models that come out of - you guessed it! - some computerised model. Do you really think that the armies of account managers employed by the likes of UBS, JP Morgan etal can all be superior money managers in addition to being personable and skillful in holding client's hands or gathering more assets? You may be lucky and hit upon an investment genius but you are as likely to be allocated a dud picker of investments.

Target Date Funds no Panacea for Retirement

Nobel Prize winner is no fan of Target Date Funds

Is your Portfolio valued correctly?

Valuing the positions in a portfolio is no easy task. But this does not mean that you should take on trust what your investment manager puts on the statements that he sends out to you. Not only will incorrect pricings affect the amount of money you can withdraw from your portfolio, the commissions (fixed or performance-based) that you get charged will also depend on the correct amounts.
Saba Suit over Canadian PensionFunds goes to Mediation (Bloomberg)

Private Equity fees a 'Trade Secret'?

Given the fact that all investment funds that are offered to the Public are regulated in one way or another is should be noted that one important aspect escapes the attention of the (usually overzealous) regulators. When it comes to the transparent disclosure of management and performance fees the end investor is usually left in the dark. His fiduciaries in the pension funds, private banks or other intermediaries may be able to dig deep into the agreements with the private equity operators but when the end investor - who ultimately bears all the risk - wants to have the full picture he is usually fobbed off with lame excuses (protection of 'trade secrets' one of the more popular ones).

Why Investors need to scrutinise all Fees

A Horrow Story of abusive fees-

• Promised Services are not performed
• Overpay for Average Returns or Underperformance
• Management Fees based on inflated Asset Values
• Valuation Methods changed opportunistically
• Back-door Fees via non-independent Experts
• Detrimental Allocation of Profits due to Outperformance
• Performance Fees not calculated properly
• Non-Business Expenses charged to fund
• Transactions executed at false prices

If this is not enough to make you seek advice on portfolio monitoring you only have to blame yourself if the net returns you receive are disappointing.

Keep in mind that even the most prestigous Fund Managers or Private Banking names should not escape close supervision.

Pitfalls of Do-it-yourself Investing

No sane individual would contemplate to challenge a Chess Grandmaster or Tennis Pro but nearly everyone with money to spare thinks he can take on the investment professionals at their game. Not that they provide stellar returns - adjusted for fees the average money manager underperforms the indices against which they are measured. But studies demonstrate that individual investors that go it alone perform even worse - and by quite a large margin. Unfortunately this still leaves the investor with a major problem - how to find a good money manager. Results produced by the investment experts - be they investment or pension funds or private bankers - show a wide dispersion, even among the funds managed by the same firm. So careful selection of a suitable money manager is nearly as difficult as selecting the next hot stock or asset class.

Never underestimate the impact of fees!

While investment results can never be predicted the impact of fees on the overall return you receive from your investments is a certainty! (Infographic)

Reading List

How to make your Financial Adviser work for you (Marketwatch)

Property a safe Investment - think again!

Zero or near-zero interest rates push desperate investors - individuals as well as institutions - to look at supposedly safe property as a haven. No one can deny that buildings and land are not safe - from a physical point of view. But in the same way that governments and their minions in the 'independent' central banks rob savers of hundreds of billions (a year!) there is no reason why states will not deny themselves the opportunity to rob/expropriate the wealth that citizens have in the shape of property. And there is the big advantage that real estate can not be moved out of the reach of the tax collector.

The only way to hold Euro-denominated Bonds

Whatever you make of the latest measures taken by the ECB to 'boost the economies' of the Euro-zone do keep in mind one key rule for your financial survival: Do not hold any bonds denominated in Euros unless they are backed by the full-faith and credit of Germany. As the interest rate on many of those bonds is now turning negative it probably is advisable to give them a miss as well and stick to cash. At some stage some members of the Euro-zone may default or leave the Euro-zone and the value of their obligations will nose-dive. So buying Italian or French bonds just because they return a measly 1.5 percent is akin to picking up pennies in front of a steamroller. Index-hugging fund managers playing with other people's money in the big investment institutions will continue to play this game of Russian Roulette and you should make sure that you avoid them if they play this dangerous game.

Media complicit in IPO hypes

Time and again one reads headlines such as this one: 'Burger chain gears up for $568 Mio. float'. This one is from CityAM and refers to the planned IPO of another Burger Chain. Apart from the question of how many such chains the world really needs - and the question of the benefit of eating too much meat, especially red meat - one has to wonder why the reporters do not take the trouble to look more closely at the purported 'valuation' that is implied by such a headline.
It is quite understandable that the lucky few among the original promoters behind the business and their (well-paid 'advisers') would put such a 'valuation' into circulation. This is known as 'anchoring' and is a well-known trick used by any wily negotiator. But by repeating this number without any proper analysis of its merits the commentariat is making itself complicit in giving this 'valuation' the appearance of correctness.
Looking behind the scenes in this particular case should give any experienced investor who is not just a momentum player or index hugger pause for thought.
Shake Shack had total revenues of just $ 82 Mio in the nine months to September 2014 (up from 58 Mio in the year ago). Net income was a grand total of $3.5 Mio (4.9 Mio) and Net Equity was a less-than-impressive $14 Mio. All that from 53 shacks (33 a year ago).
Now there have been some hefty valuations in the fast-food business during the recent past and Chipotle Mexican Grill (ticker CMG) continues to trade at vertigo-inducing levels. This may or may not be the correct 'valuation' for a fast food chain. History will sort this out.
But it would be only good journalism if news items about new share issues would be treated as more than just re-hashed publicity items. Much emphasis is being put by policy wonks on the importance of fostering wider share ownership as part-solution for the evolving retirement crisis many baby boomers and succeeding generations will face. Giving them 'access' to new issues trading at stratospheric levels will only benefit the (early?) retirement of the 1% - or even only the 0.01%.

Do you understand the fees that you pay for Private Equity?

If even very large institutional investors have difficulty understanding the various fees that are charged by Private Equity firms it should be obvious that any investor should have intense scrutiny performed before allocating any funds.

Oil won't hit $80 for decades?

Prediction is very difficult, especially if it's about the future. A useful reminder for this Strategist. (CNBC)