There is a well-known wealth management firm based in central London. If you are invited to a meeting over lunchtime, you will be shown into a lovely, panelled room. When I last went to one of these meetings we hadn’t got five minutes into the conversation when a waiter appeared from behind a hidden panel and asked ‘would Sir like a glass of wine before lunch is served?’. Of course Sir absolutely did want a glass of wine before starting in on a very pleasant three-course meal over which we chatted.
It is a clever way of having an initial meeting as it certainly warms prospective clients up to doing business with this particular firm.
This sort of entertainment of the ‘right clients’ is not unique in London to just this one firm.
Of course the clients are paying for this through the high percentage portfolio fees they are paying. So far so standard for this blog, you are thinking. However the clients were paying a heavy price in a second way, unrelated to the expensive lunches.
This firm, like many other traditional wealth managers and private banks, knew that they couldn’t outperform the stockmarkets. This is a problem as how do you justify high fees when you can’t do the one thing that clients employ you for.
They had decided that the way to do this was to make the client worry more about losses than get excited about gains. This is clever because as humans we are wired to worry more about negative outcomes than we are to be excited about positive ones. This is the reason why most news is negative rather than positive, negatively sells.
A whole industry has grown up in the last few decades selling expensive ‘risk managed’ portfolios. They have been called all sorts of marketing names; absolute return, controlled volatility, smoothed managed, downside protection, guaranteed kick-out, the list is endless.
What these approaches do is charge us as clients a high percentage of our wealth to control the volatility of our portfolios. The problem is that volatility is your friend when markets are rising and they rise more often than they fall.
This portfolios do control the downside but they also control the upside and the average result is a worst return. What is the point of being able to sleep at night if you run out of money too early in life?
This wealth manager with its nice dining options, not only charged a high percentage of client portfolios but also managed to return their client returns to almost flat over a five year period when stockmarkets produced double digit returns.
Do their clients understand how much growth they have lost? Probably most of them don’t because they have had the message about risk constantly reinforced and so they feel at least the mediocre returns are positive.
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