Swiss Bank retro-commissions, a conflict of interest.
All is not well for the wealthy clients at the Swiss banks; post US mortgage securities fall-out, and the long nasty practice of retro-commissions.
April 30 2007, was the 10 year anniversary of Thaistocks.com! I plan to bring to members some key note articles which I promise will be at the very least eye brow raising at this auspicious time. But my aim is not at all to inflate nor to twist you into awe, but more so to expose some of the shady western (in this case Swiss) practices in my profession, which sadly remain mostly unreported anywhere -and yet to me and others are, how else to call it, are shameful to the investing profession.
It remains fashionable around the higher zone investor world for some of the rich and famous, as well as for the private and discreet, to cherish Swiss Bank accounts and so have their wealth there managed by the polished gnomes of Zurich and Geneva, the key financial centers in Switzerland.
But is it all it cracks up to be? And are some of the cracks now tearing away? I think so.
No doubt most all Swiss bankers offer good service besides discretion. But also a host of ever expanding services, products and investment alternatives; not the least and just to name a few are derivatives, funds, ETF and a tray of other fancy cooked up choices only surpassed by their creative names. It is yet to be seen (or will we ever see it?) how the recent scandal of now dropping US mortgage backed securities affect private clients portfolios’ worldwide. These so called CDO’s have been the fastest growing debt market… well outpacing corporate municipal bond sales by US$ totals. Some 500 Bill. US$ were sold in 2006, up from 99 Bill. the year before, according to my old employer Morgan Stanley.
The function of these products is/was with creativity to ever expand on making the process of investing into a glamorous smorgasbord of selections so to appear to address investor/client needs. In reality most of them bundle a host of fees which benefit both the bank and in many cases the outside money managers. Financial cities there regularly hold fancy luncheons at top Hotels and gourmet Restaurants inviting mostly outside money manager crowd so to tour, then tout and promote, these latest gimmicky of nouveau investor plans. Few investor' Yachts are to be seen.
A little over a year ago, on location, I attended such a parade of outside money manager working luncheons -and was amazed to find that each and every one of these just then was all around the commodity bull cycle then so in vogue. With gold mining stocks being the most prominent ones featured. I wrote an article about it back in May of 2006 and then duly cautioned members not to get sidetracked in the hype. Most of these are substantially lower today. Gold so far & since, has failed as a viable investor class.
here
As I recently re-checked some of the stock/fund performance since these polished presentations and found the average decline since to be around 30-40%, with some loosing more then 70% in value.
As just one example of one of the more prominent ones see, and note where it was in late April ’06, when the presentation was given in Zurich. Click right here: eAMERIX
And to me, Amerix at the time, was the one that sounded among the very best as the speaker was highly polished, just as gold -and the Swiss bankers can be. Since them, Amerix lost over 80% of its value in US Dollars terms, despite the price of Gold holding-up.
But this article is not about a rehash/review of these presentations and the traps they often present. This member-only article is straight to regarding the shaded practices of the many (if not all) Swiss banks around the now -rightly so- controversial practice of so called "retro commissions". There is a 100 year old federal Swiss law prohibiting retro's, still in effect, but not enforced.
So called Retro-commissions are often regularly hidden paid commissions paid-out by the Swiss banks to the outside money manager, this as an inducement to not only kept clients funds at this bank, but to keep the accounting/trading active. Retro's are what should be called rebates to the money manager on the commissions charged to the clients, by the Swiss banks. They are to say the very least, highly controversial, as they present a clear and direct conflict of interest to the investor client. The practice is and always was highly illegal in the US; and few know this: but also so in Switzerland.
The conflict of interest is that while the client presumes the appointed outside money manager is always making transactions and investments purely & only with their interest in mind, in fact the money manager is benefiting regularly by receiving a kick-back (how else to call it?) directly from the bank.
Again, called the retro-commission practice and to me, as so in many other countries around the world, it’s a nasty and unprofessional besides illegal practice. Yet, this carries out and is widespread with Swiss Banks. It truly goes smack against the proper norms of professional ethics. After all the investing client pays the money manager to look out for his/her interest only. Not to benefit on the other side, from initiating more transactions or to advocate investment vehicles with higher retro-commissions. Its good for the Bank and the money manager, not so at all for the trusting client. An obvious conflict of interest is at hand. How long will this be tolerated?
Regularly investment products come around bundled in a fund or other such packaged financial vehicles, which while promising decent returns, actually too often have a high front load and/or an investor long lock- in period. Some are more competitive then others, and yes, some pay far higher up front commissions then others. The client after all pays the money manager a fee for the "professional" job of selecting the best investor products for his patron. With "best" meaning for the client, not the bank or money manager! Today we see that US mortgage backed securities were far over hyped, less is known that they paid huge fees to those whom packaged them and those whom sold them.
The fee is paid under the very clear assumption that the client appointed money manager will watch-out, what is the best selection from the investor viewpoint. In practice… well you can answer for yourself what your think too often the money manger biases. The investor, usually a novice in the business, is in no position to judge, evaluate and compare the different, ever more complicated alternatives. That in fact is the "quid pro quo" why he/she chooses in first place to have a money manager to this professional job for them. But no "equal exchange or substitution" take place as there is a true and real conflict of interest between the client and the money manager. Most disturbing is, most investor clients do not know, that their interests are not aligned fairly.
The issue of Retro's has recently been coming-up in select subdued conversations and rare newspaper articles. The practice is illegal and there is a century old Swiss federal law which says so (see enclosed translation and original newspaper article in German). Some money manager claim its actually ok, as long as the client is informed about the practice. Others claim its just the way it has been done for a long time and so an established practice, end of story. A recent search in Google and answers.com did not bring insights in any related articles on this.
Many banks have provisions to inform the clients and do so, others do not. Some banks have specific agreements with their money managers which stipulate that if the account turnover (transaction commissions) is increased in the last months of the year, the retro commission pay-out will be even higher. Or worse, the whole retro commission kick back will be voided to the money manager if there is not a bare minimum generated within a calendar year. As stated, in some cases, this retro commission payout is actually increased in percentage points if a certain threshold is met. When you think about it this is a true "death tax" as it induces the trusted money manager to transact feverishly ever more.
In practice here is what can and does happen, just as an example: an outside money manager for a Swiss Bank has say 5 large accounts. At the end of the year, 4 out the 5 show lousy to average returns in the single digit level, perhaps because too much trading took place.
But one of the 5 accounts has done rather well, because several investments moved-up in value and where held on to. The money manager knows his/her review with this particular client will go well at year-end, as the returns are well above average. The money manager so then decides to actively trade this account actively during the last months of the year as the thinking goes "if I trade well, this can only be good for me….and if I end-up taking some losses by undue trading, I have the year to date performance cushion. Meaning: either way, I will make good money as the Bank will then increase the retro commission payout to me".
Nothing to loose, has always been a clever way to get ahead. Clever perhaps, but in this case highly unethical, and the bank knows it yet looks the other way. (Remember, in general Swiss Bank brokerage and other commissions are among the very highest in the world).
The HSBC bank in Zurich for example charges 1.5% commissions, one way, on Thai stock executions, that is if you are lucky and they take on your account. That is 6 times more the transaction fee as compared to buying directly Thai stocks with a Thai broker, or 10 times more as compared to on line trading with a Thai broker. Perhaps they make special deals with more knowledgeable/demanding and large customers? But even this, non-Swiss bank in Switzerland, has a retro-commission plan on hand and in place for its outside money managers.
Swiss Banks are engorged in a camouflage of investor products intertwined with their money managers and chuck full of commissions, which always paid by the client. Their trading/transacting fees are expensive and among the highest in the world and stock as well as currency exchange fair executions at times can be questionable -but most of all: the retro-commissions is the ultimate aggravated investor insult/assault as it goes against all norms of ethical practice and spank against the conflict of professional "no conflict of interest doctrine".
In some professions it is illegal to have even a potential conflict of interest, even if this is not taken advantage of. Just the exposure to such a potential results in license revocation. The US sate of Arkansas revoked ex-President Clinton his law license for this reason.
So next time your rich Uncle, or your movie Star god-mother, privately brags to you about the efficiency of the Swiss banks ask him: yea -but what about those very high transaction commissions and most of all: the long dubious practice on Swiss bank retro commissions to outside money managers!
Best Regards,
Paul A. Renaud.
Enclosures:
Here is page 1 of the English Translation of the Swiss Newspaper German article, "Tages-Anzeiger" of July 2 2006.:
Page 1 Swiss Retros English Translation
And here is page 2:
Page 2 Swiss Retros English Translation
Below is a scan of the orginal article in the leading Swiss-German Newspaper "Tages-Anzeiger" of July 2 2006.
The translated title is "Here are how investors are taken for a ride"
The picture, only partially shown above:
