Conflicts of interest among some banks and financial intermediaries.
Here is an e-mail question I submitted this morning to CNBC Squawk box, Asia TV:
8 AM, July 17 ‘09
Dear CNBC Asia, Squawk box,
While your frequently featured guest "the bear" Marc Faber is ever quick to criticize US companies and the US Fed. etc, at any opportunity, why does he not respond on something closer to his own nationality/home country?
Why not ask him about the Swiss banks?
Specifically, the very nasty -and indeed illegal- entrenched Swiss banking practice on so called retro-commissions. Whereby most Swiss banks rebate part of their clients paid commissions, in cash to their outside money managers. Not only is this a clear conflict of interest by an entrusted fiduciary money manager, but in fact its illegal under a Swiss 100 year old federal law.
Yet this appalling practice continues, smack against the interest of their clients. It is this practice which pumped billions of US housing bonds (which turned out toxic) into their clients accounts. They are part of the horrific financial crisis which was created worldwide.
Mr Faber deserves to be asked what he thinks about Swiss Banks -and these ill-practices.
Paul A. Renaud.
Previous Guest on your show.
My shorter (understandably abbreviated) question was in fact submitted to Mr. Faber some 20 minutes after I e-mailed CNBC.
Mr. Faber answered among these lines: if the clients was made aware of those retro’s commissions, then its OK. Where he does think there is a conflict of interest is if say a Lawyer gets an introductory commission from the Bank, even while he is charging the client an hourly rate.
Here is how I followed up on that. The subject was not re-visited:
Thank you CNBC for submitting my question to Mr.Faber. Here is my response:
In fact Bank retro's money paid to outside money managers are much worse then a simple introduction fee to some lawyer, as Mr. Faber claimed. Because:
1) The money managers is the one whom makes the investment decisions, not the lawyer, so he can be biased in placing the client investments in the investment product which makes him/her (the money manager) most in retro-commissions. Compare this to the lawyer, which does not have a say where the investment capital goes to.
2) Retro's commissions to outside money managers are in fact illegal under a 100 year old Swiss Federal law (as they are illegal in USA), rightly so as they are a clear ‘slam dunk’ conflict of interest. Even so, if the client knows about it. And most don't…that’s part of the point. I am not suggesting Mr. Faber is part of this practice or not, only that his home country Switzerland is much to blame due to bad/illegal/conflict of interest practices which helped bring on this crisis.
Billions of US subprime housing bonds were placed in global clients accounts exactly because these paid the most, not just some, in retro- commissions to money managers and banks. One of the horror's of this financial crisis are these long established dubious Swiss bank practices which fuels/ed a huge misallocation of capital; not just US politicians/the US Fed and US treasury as Mr. Faber states all the time.
Best Regards,
Paul Renaud.
Thaistocks.com SA.
Why do I bring this up here to Thai stocks investors/members? Some further comments to put this in proper perspective.
First, have enough global citizens asked themselves what created the US originated financial tsunami? Surely part of it has been a gross misalignment on conflicts of interest by many money managers. Billions of savings all over the Western world were blindly just plowed into US housing bonds -along with its derivatives. And this mostly so, because they paid the highest commissions to private money managers.
Ask any polished bank manager what he thinks of stocks as a long term investment? Most all will answer in one way or another against, and all with good parlance, mostly "no". Risky, volatile, prone to crisis, fraud, manipulation etc… Why is this so? In spite of stocks long superior performance, as an asset class. As I review in the just previous article.
Some will say, “well because the bank manager is prudent and has more to loose then to gain by taking a long term stock up-beat view”. True enough -and that alone can explain their view. But another factor creeps in. If the client goes to a broker and buys stocks, the commission rates are low, fixed and clear. Not much room for retro’s kick back. Also, then capital is removed from the bank to the broker and so most banks are no longer part of it.
But if banks (or the so called wealth managers) talk the clients out of stocks as a legitimate investment class, through the various scare techniques, then the bank likely keeps the capital in-house. And so surely comes up with an alternative investment product which might look and feel “more prudent” to the client. Perhaps so for a while, but then likely over time is lagging performance wise.. Yet, surely this prudent alternative pays far more in commissions to the banks/wealth managers. Therefore, in many bank/investors interactions, it is often to the banks (or wealth manager) much own advantage in talking investors out of stocks! And so into their own highly acclaimed alternatives (often fee loaded) investor choices/products. Or even more profitable to the banks, how about daily currency trading?
The conflict of interest is clear and distressing. Banks, many money managers and so called self acclaimed wealth managers are on a different motivating agenda -then their investor clients. As some bank advocated investment products clearly pay outside managers as well as the bank more commissions then others. Regardless of the long term investment record and so proven merits of stocks over time. Client investors so get seduced as how can one find fault with more "prudent alternatives". The brain twisting and then higher fees continue, at the expense of lower long term investor returns to clients...,not to mention that owning shares in good companies is something which helps a country's economic devlopment. As compared to owning housing bonds -now defunct?, and currency trading which neither did nor do.
Paul A. Renaud.
