My private bank has a lot of funds

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tradez
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My private bank has a lot of funds

Post by tradez »

Full transparency - I have a 7-figure discretionary portfolio with a global private bank. Their fees are about 1% PA + product costs. Breaking down the portfolio I am 60/40 split and it’s made up of about 20 equity ETFs/Funds, and 5 bond funds. They make changes every few months. (Side note: I know this is too conservative given I am in mid 30s)

I’ve spent far too much time now reading about passive investing, and I’m very intrigued to pull the money out and invest it myself. Question I have is why the bank (and most other wealth managers) would invest in so many funds. There must be an advantage to doing this or they would minimize the number/complexity. I don’t believe they do it simply for optics in order to make it look like they are doing a lot. This is a global renowned private bank. There must be advantages.

Keen on your thoughts. I am extremely nervous about pulling the trigger as although it all makes sense on paper, I can’t help but think the bank are professionals and can surely make 1% more than me who has no experience.
chinchin
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Re: My private bank has a lot of funds

Post by chinchin »

I don’t believe they do it simply for optics in order to make it look like they are doing a lot.
That's exactly why they do it.
not financial advice
Jags4186
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Re: My private bank has a lot of funds

Post by Jags4186 »

If there were a secret to consistent 1%+ alpha they wouldn’t be selling it to you for 1%.
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arcticpineapplecorp.
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Re: My private bank has a lot of funds

Post by arcticpineapplecorp. »

How do you explain the spiva data that shows only 20% of active funds beat the s&p index in any given year? Surely these are smart, well paid, well pedigreed experts in their field. And yet they don't beat the market long term. I'm not equating your wealth manager with a mutual fund manager. I know your wealth manager is not stock picking. But still they can't have an expectation of beating the market (especially when you're paying 1% per annum). They're convincing you they have a more diversified or complicated portfolio but that doesn't mean greater net returns (after fees).

Why don't you post their suggested portfolio so we can look under the hood and compare it to a simpler low cost 60/40 portfolio?

They do it to:
1. make you think the fee is worth it
2. Make you think twice about leaving (too hard/costly, especially in taxable account to unwind all those positions).
3. Make you think it should be this complicated and you can't do this on your own.
Last edited by arcticpineapplecorp. on Wed Jan 18, 2023 6:05 pm, edited 2 times in total.
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arcticpineapplecorp.
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Re: My private bank has a lot of funds

Post by arcticpineapplecorp. »

Error
Last edited by arcticpineapplecorp. on Wed Jan 18, 2023 6:06 pm, edited 1 time in total.
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mikejuss
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Re: My private bank has a lot of funds

Post by mikejuss »

tradez wrote: Wed Jan 18, 2023 5:52 pm I’ve spent far too much time now reading about passive investing, and I’m very intrigued to pull the money out and invest it myself. Question I have is why the bank (and most other wealth managers) would invest in so many funds.
If you don't know the answer to this question, then you haven't spent "far too much time now reading about passive investing."
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tradez
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Re: My private bank has a lot of funds

Post by tradez »

arcticpineapplecorp. wrote: Wed Jan 18, 2023 6:00 pm How do you explain the spiva data that shows only 20% of active funds beat the s&p index in any given year?
Would they be considered an active fund though?

I guess it’s also the comfort knowing that if there was a huge macro economic change, they would rebalance the portfolio or change the weighting whilst a passive investor may not have that knowledge.
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arcticpineapplecorp.
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Re: My private bank has a lot of funds

Post by arcticpineapplecorp. »

tradez wrote: Wed Jan 18, 2023 6:26 pm
arcticpineapplecorp. wrote: Wed Jan 18, 2023 6:00 pm How do you explain the spiva data that shows only 20% of active funds beat the s&p index in any given year?
Would they be considered an active fund though?

I guess it’s also the comfort knowing that if there was a huge macro economic change, they would rebalance the portfolio or change the weighting whilst a passive investor may not have that knowledge.
1. if your private bank is "making changes every few months" (your words) then i guess that makes them active too. Because I don't really think rebalancing is required every few months. (source: https://thefinancebuff.com/5-percent-re ... -band.html)

2. if there was a huge macro economic change, wouldn't your wealth manager be too late? They should make the necessary changes BEFORE the huge macro economic change, not after.

3. "change the weighting"? What does this mean exactly. Are we talking sector investing like they determine the tech sector is overvalued and put more of your portfolio in the energy rather than tech sector? If so, you might want to read this recent post on that and my response here:

viewtopic.php?p=7069954#p7069954

4. they have knowledge that the "passive investor may not have"?

first, let's remember that people all too often confuse information with knowledge.

they can't have any information that everybody else doesn't also have. That's the beauty of a publicly traded market. All information has to be made publicly available to all participants at the same time. Otherwise if some had information others didn't, it wouldn't be a fair market and nobody would play in that game.

so they can't profit because they know the same things everyone else does. They have to know something others don't. But they can't act on that because that's insider trading. Now even though they have the same information as everyone else, they could make conclusions or guesses with that information than others and could profit if they come to a different determination than everyone else.'

(this is still not knowledge however. If they guess right is it skill or luck? you won't know until their luck runs out, then you'll know for sure).

problem is then that means your portfolio won't track the market. It has to look different and possibly seem weird because they're doing something different from everyone else. If they're right, they'll look like geniuses. If they're wrong, they'll be blamed for not just owning the market. You gonna be ok with your portfolio not tracking the market? Feeling lucky?
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Topic Author
tradez
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Re: My private bank has a lot of funds

Post by tradez »

arcticpineapplecorp. wrote: Wed Jan 18, 2023 6:35 pm
4. they have knowledge that the "passive investor may not have"?

first, let's remember that people all too often confuse information with knowledge.

they can't have any information that everybody else doesn't also have. That's the beauty of a publicly traded market. All information has to be made publicly available to all participants at the same time. Otherwise if some had information others didn't, it wouldn't be a fair market and nobody would play in that game.

so they can't profit because they know the same things everyone else does. They have to know something others don't. But they can't act on that because that's insider trading. Now even though they have the same information as everyone else, they could make conclusions or guesses with that information than others and could profit if they come to a different determination than everyone else.'

(this is still not knowledge however. If they guess right is it skill or luck? you won't know until their luck runs out, then you'll know for sure).

problem is then that means your portfolio won't track the market. It has to look different and possibly seem weird because they're doing something different from everyone else. If they're right, they'll look like geniuses. If they're wrong, they'll be blamed for not just owning the market. You gonna be ok with your portfolio not tracking the market? Feeling lucky?
I guess what I’m trying to say is there are still a number of options for the passive investor. 2 funds, 3 funds, 4 funds, 5 funds. Do you invest in an All Cap, do you invest in US Large Cap, do you add emerging markets and so on.

There are still so many variations for the passive investor that choosing one set of ETFs versus another (with the same AA) can yield entirely different results. The delta between them could be far more than the fees the bank takes….I guess this leads me onto a further question - How does one decide on their portfolio once they have their AA: there are a plethora of options as highlighted above. Again, does an active manager make a more informed decision because they still have more of an understanding of the market than you. And no, I am not talking about inside trading or anything or the sort, but simply understanding the makeup of the entire market better, so what combination within the parameters of my AA will likely yield the best result.

I am nervous that although I know my AA is 80/20, I could underperform someone else’s or a banks portfolio substantially, simply because they selected a better set of ETFs. What is the perfect portfolio…

If simplicity is best, why doesn’t everyone use a 2 fine portfolio. Is complicating it simply to scratch an itch, or a “what if” but no evidence it outperforms?
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inittowinit
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Re: My private bank has a lot of funds

Post by inittowinit »

tradez wrote: Wed Jan 18, 2023 5:52 pm There must be an advantage to doing this or they would minimize the number/complexity. I don’t believe they do it simply for optics in order to make it look like they are doing a lot.
That IS the advantage -- it's just their advantage, not yours. By creating a complex-looking portfolio they are seeking to increase your perception of their value ("wow, I could never invest on my own -- too complicated!").

Rather than using complexity as a proxy for quality, the appropriate method for evaluating them would be to compare their risk-adjusted performance after taxes and fees to benchmarks and/or peers over several different time periods. Then you are comparing apples to apples.
coachd50
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Re: My private bank has a lot of funds

Post by coachd50 »

tradez wrote: Wed Jan 18, 2023 5:52 pm
... There must be an advantage to doing this or they would minimize the number/complexity. I don’t believe they do it simply for optics in order to make it look like they are doing a lot. This is a global renowned private bank. There must be advantages.

Keen on your thoughts. I am extremely nervous about pulling the trigger as although it all makes sense on paper, I can’t help but think the bank are professionals and can surely make 1% more than me who has no experience.
The actions you refer to in the first paragraph (bolded by me) are taken to create your thoughts in paragraph 2 (italicized by me)

There was a really good freakenomics podcast on a similar subject--why doctors, chefs, and other experts buy generic.
Last edited by coachd50 on Wed Jan 18, 2023 7:20 pm, edited 1 time in total.
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arcticpineapplecorp.
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Re: My private bank has a lot of funds

Post by arcticpineapplecorp. »

tradez wrote: Wed Jan 18, 2023 6:57 pm I guess what I’m trying to say is there are still a number of options for the passive investor. 2 funds, 3 funds, 4 funds, 5 funds. Do you invest in an All Cap, do you invest in US Large Cap, do you add emerging markets and so on.

There are still so many variations for the passive investor that choosing one set of ETFs versus another (with the same AA) can yield entirely different results. The delta between them could be far more than the fees the bank takes….I guess this leads me onto a further question - How does one decide on their portfolio once they have their AA: there are a plethora of options as highlighted above. Again, does an active manager make a more informed decision because they still have more of an understanding of the market than you. And no, I am not talking about inside trading or anything or the sort, but simply understanding the makeup of the entire market better, so what combination within the parameters of my AA will likely yield the best result.

I am nervous that although I know my AA is 80/20, I could underperform someone else’s or a banks portfolio substantially, simply because they selected a better set of ETFs. What is the perfect portfolio…

If simplicity is best, why doesn’t everyone use a 2 fine portfolio. Is complicating it simply to scratch an itch, or a “what if” but no evidence it outperforms?
1. I believe you're searching for the "optimal" portfolio and you may believe (or were convinced) the wealth manager can get you that optimal portfolio.

you will never know the "optimal" portfolio beforehand. It can only be known after the fact. That doesn't help you.

Read this post to see you can always find 150 portfolios better than yours

2. simplicity may or may not be the best. what's best is what can help you reach your goals in the easiest manner. If you can reach your goals with 2 funds, then why hold more? Some do complicate things with factor tilts or individual stocks or whatever. People do lots of things but that doesn't mean it's going to get them the best outcome. Sometimes it depends on the timeframe. Even Eugene Fama on the Rational Reminder podcast said 20 years to see a small cap value premium is not unheard of and if you're going to make a bet against the market (which is the efficient portfolio) then you have to "ride that into the sunset" (his words). Because you can't give up or you shouldn't try to do something more complicated. Here's an example of why holding small cap value is so hard (it has long periods of underperformance and short bursts of outperformance. unless you're holding and don't abandon ship before the returns show up, you'll never get the premium):

Image

3. there is no evidence a particular strategy "will outpeform" in the future. We only know what happened in the past. And the past is not prologue. There is no risk in the past, only the future.

4. you have to decide what's right for you. Investor know thyself. I read/researched/agonized over whether or not to tilt to factors and decided instead to just own the market instead. It might outperform, it might not. It doesn't matter for me because I'm trying to just get to enough. Paul Merriman who espouses factor investing wants to help people get to "more than enough".

5. Your consternation is not unusual by the way. It's very common for people to agonize about the "right" way to invest. Rick Ferri has put it this way:
4 Stages of Rick Ferri’s Index Investor’s Education

Darkness – get rich quick. What hot stock tip can you get in the doctor’s lounge. This is the pursuit of a “hot stock tip that will make me rich quick.”
Enlightenment – reached by an epiphany that low cost index investing is the way to go.
Complexity – rabbit holes such as perfect optimal allocation, products, factor investing paralysis by analysis
Simplicity – you realize that none of the complexity matters, it is all about asset allocation. Complexity provides more money for the financial-industrial complex. Be simple to achieve your goals.

source: https://www.fiphysician.com/the-educati ... ick-ferri/
6. whatever you decide to do, the most important thing to do is just stick to your plan. The thing that hurts returns the most is switching from one thing to another (strategy/fund/stock, etc). It's been said a portfolio is like a wet bar of soap; the more you handle it, the smaller it gets.

you might want to write up an investment policy statement. whether you work with an advisor or go it alone, you need to know what you're doing and why. it also helps you to stay on course and remind you periodically why you're doing what you're doing.
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Re: My private bank has a lot of funds

Post by Grt2bOutdoors »

tradez wrote: Wed Jan 18, 2023 6:26 pm
arcticpineapplecorp. wrote: Wed Jan 18, 2023 6:00 pm How do you explain the spiva data that shows only 20% of active funds beat the s&p index in any given year?
Would they be considered an active fund though?

I guess it’s also the comfort knowing that if there was a huge macro economic change, they would rebalance the portfolio or change the weighting whilst a passive investor may not have that knowledge.
That would require them to have a crystal ball. So my next question to them would be for the global renowned private bank to provide you with the recorded returns for 1999-2002, 2007-2009 and every bear market since for both equities, bonds and cash. You will see that they missed every single market shift before the upheaval of the markets. You could own a fund like Vanguard Lifestrategy moderate growth for 11bps (not recommended in a taxable account) or have Vanguard PAS manage it for 30bps and that takes care of the rebalancing issue, they may be able to handle tax efficiency as well for you.
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billfromct
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Re: My private bank has a lot of funds

Post by billfromct »

Why don’t you take a $100k or $200k & invest it yourself with Vanguard, Fidelity, etc in a 2, 3 or 4 fund portfolio & compare the quarterly/annual returns to your money manager.

It would be tough to use Portfolio Visualizer because I’m sure they must churn the portfolio to make it look like they are moving money into better performing assets.

Of course you would have to take 1% from their total return to account for their 1% AUM fee.

bill
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Re: My private bank has a lot of funds

Post by MarkRoulo »

tradez wrote: Wed Jan 18, 2023 5:52 pm Full transparency - I have a 7-figure discretionary portfolio with a global private bank. Their fees are about 1% PA + product costs. Breaking down the portfolio I am 60/40 split and it’s made up of about 20 equity ETFs/Funds, and 5 bond funds. They make changes every few months. (Side note: I know this is too conservative given I am in mid 30s)

I’ve spent far too much time now reading about passive investing, and I’m very intrigued to pull the money out and invest it myself. Question I have is why the bank (and most other wealth managers) would invest in so many funds. There must be an advantage to doing this or they would minimize the number/complexity. I don’t believe they do it simply for optics in order to make it look like they are doing a lot. This is a global renowned private bank. There must be advantages.
...
No, there need not be advantages to you from the complexity.

Imagine that the bank charged you 1%/year of assets under management and simply put all your assets they were managing into the Vanguard Balanced Index Fund. After a few years you might start suspecting that you didn't need to pay them 1%/year to do this.

Now, I am quite confident that the folks at the bank are convinced that they are adding value by doing this, but to quote Upton Sinclair, "“it is difficult to get a man to understand something, when his salary depends on his not understanding it.”
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Re: My private bank has a lot of funds

Post by DrChronzworth »

“There are still so many variations for the passive investor that choosing one set of ETFs versus another (with the same AA) can yield entirely different results. The delta between them could be far more than the fees the bank takes….”

Could be but extremely unlikely - the differences in performance between say Fidelity, Schwab and Vangiard passive funds tracking similar benchmarks are much less than 1% per annum.

Anyway, per your previous question the reason the advisor puts you in so many funds is because he makes a lot more money AND it looks like he’s doing something.
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arcticpineapplecorp.
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Re: My private bank has a lot of funds

Post by arcticpineapplecorp. »

tradez wrote: Wed Jan 18, 2023 5:52 pm Keen on your thoughts. I am extremely nervous about pulling the trigger as although it all makes sense on paper, I can’t help but think the bank are professionals and can surely make 1% more than me who has no experience.
actually, this doesn't make sense when you think it through.

let's say the average annual return for the market has been 12% for the past 100 years (source: https://investor.vanguard.com/investor- ... allocation).

Now let's say your wealth manager charges you 1% per year.

In order to just match the market's return (not beat it. just match it) they have to earn 13% per year.

They have to beat the market by 1% per year over a long time period to just break even with the market (deliver the SAME return as if you bought the market yourself).

So now if they want to BEAT the market, they actually have to do better than the market by MORE than just the 1% fee they're charging you.

Say you want to BEAT the market by 1% a year.

The wealth manager has to earn 14% per year on average so that after they charge you a 1% fee, they gave you 13% returns while the market grew by 12% a year.

if the market grows (grew?) by 12% a year, what makes you so certain your wealth manager will earn 14% a year over the long term?

what if you're wrong?

if you then assume, "well, that's ok. As long as they don't underperform the market. As long as they match the market, it's ok, right?" Well, no. Because if they earn 12% a year like the market because they can't BEAT the market, then after fees you earned 11% when you could have earned 12% if you just owned the market yourself.

that's what makes sense on paper to me.

what do you think about that?

have you read William Sharpe's The Arithmetic of Active Management?
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coachd50
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Re: My private bank has a lot of funds

Post by coachd50 »

arcticpineapplecorp. wrote: Wed Jan 18, 2023 8:35 pm
tradez wrote: Wed Jan 18, 2023 5:52 pm Keen on your thoughts. I am extremely nervous about pulling the trigger as although it all makes sense on paper, I can’t help but think the bank are professionals and can surely make 1% more than me who has no experience.
actually, this doesn't make sense when you think it through.

let's say the average annual return for the market has been 12% for the past 100 years (source: https://investor.vanguard.com/investor- ... allocation).

Now let's say your wealth manager charges you 1% per year.

In order to just match the market's return (not beat it. just match it) they have to earn 13% per year.

They have to beat the market by 1% per year over a long time period to just break even with the market (deliver the SAME return as if you bought the market yourself).

So now if they want to BEAT the market, they actually have to do better than the market by MORE than just the 1% fee they're charging you.

Say you want to BEAT the market by 1% a year.

The wealth manager has to earn 14% per year on average so that after they charge you a 1% fee, they gave you 13% returns while the market grew by 12% a year.

if the market grows (grew?) by 12% a year, what makes you so certain your wealth manager will earn 14% a year over the long term?

what if you're wrong?

if you then assume, "well, that's ok. As long as they don't underperform the market. As long as they match the market, it's ok, right?" Well, no. Because if they earn 12% a year like the market because they can't BEAT the market, then after fees you earned 11% when you could have earned 12% if you just owned the market yourself.

that's what makes sense on paper to me.

what do you think about that?

have you read William Sharpe's The Arithmetic of Active Management?
I think he was saying that low cost broadbased index fund investing "made sense on paper" but that he was scared to switch because of the belief that the bank "has to be better" than he would be
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Re: My private bank has a lot of funds

Post by typical.investor »

arcticpineapplecorp. wrote: Wed Jan 18, 2023 8:35 pm
tradez wrote: Wed Jan 18, 2023 5:52 pm Keen on your thoughts. I am extremely nervous about pulling the trigger as although it all makes sense on paper, I can’t help but think the bank are professionals and can surely make 1% more than me who has no experience.
actually, this doesn't make sense when you think it through.

let's say the average annual return for the market has been 10% for the past 100 years.

Now let's say your wealth manager charges you 1% per year.

In order to just match the market's return (not beat it. just match it) they have to earn 11% per year.

They have to beat the market by 1% per year over a long time period to just break even with the market (deliver the SAME return as if you bought the market yourself).

So now if they want to BEAT the market, they actually have to do better than the market by MORE than just the 1% fee they're charging you.

Say you want to BEAT the market by 1% a year.

The wealth manager has to earn 12% per year on average so that after they charge you a 1% fee, they gave you 11% returns while the market grew by 10% a year.

if the market grows (grew?) by 10% a year, what makes you so certain your wealth manager will earn 12% a year over the long term?

what if you're wrong?

if you then assume, "well, that's ok. As long as they don't underperform the market. As long as they match the market, it's ok, right?" Well, no. Because if they earn 10% a year like the market because they can't BEAT the market, then after fees you earned 9% when you could have earned 10% if you just owned the market yourself.

that's what makes sense on paper to me.

what do you think about that?

have you read William Sharpe's The Arithmetic of Active Management?
All very interesting yet Vanguard says an advisor on average adds 3% such that your money will double compared to not using an advisor for 25 years.

I know because I got an ad today quoting Vanguard that I could have 3.4M after 25 years instead of 1.6M.
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arcticpineapplecorp.
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Re: My private bank has a lot of funds

Post by arcticpineapplecorp. »

typical.investor wrote: Wed Jan 18, 2023 8:42 pm All very interesting yet Vanguard says an advisor on average adds 3% such that your money will double compared to not using an advisor for 25 years.

I know because I got an ad today quoting Vanguard that I could have 3.4M after 25 years instead of 1.6M.
If they agree to put that in writing (that no matter how markets do in the next 25 years, they'll GUARANTEE you $3.4M) then I'd take them up on their offer. See if they'll put it in writing. If they won't, then you have your answer. Talk is cheap.

By the way, Vanguard isn't saying they'll add 3% to what you'd earn from the market. They're saying they believe they can do better than the average investor can do for themselves, mainly due to behavioral coaching (so not making rash decisions/panic selling/performance chasing, etc), but other factors investors sometimes can't bring themselves to do when needed (rebalancing), proper asset location, withdrawal strategies, choosing low expense funds, etc:

Image

source: https://advisors.vanguard.com/iwe/pdf/IARCQAA.pdf

by the way, some well know advisors I believe Rick Ferri himself, doesn't put much stock in that paper by Vanguard. Still, I think there is a performance gap in that many investors don't get the return of the market. But the reasons why may be debatable (like a DCA strategy which most of us must employ out of necessity/how we're paid are going to get you a different return than a yearly return which assumes money is invested Jan 1 and then never again for the rest of the year).
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123
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Re: My private bank has a lot of funds

Post by 123 »

tradez wrote: Wed Jan 18, 2023 5:52 pm ...They make changes every few months...
So you won't make the effort to compare their results with the market indexes. They mix it up so you can't figure it out. They confuse you into inaction so you keep the AUM arrangement. They know what is likely to work to retain AUM clients. that's a high priority with them (afer getting new clients).

The portfolio you get from them is likely nothing special. They have a couple of templates on investments models and slot you into one and then the computer takes over. They have the same general portfolio for all their customers because it's a whole lot easier to respond to client questions. If you were running a similar business would there be any reason to do it any other way? The clients are not sophisticated investors so it all works.
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Re: My private bank has a lot of funds

Post by HKexpat »

There may be tax reasons for investing in multiple funds and exchanging between them. This is going to depend on your tax jurisdiction, but you may be able to deduct losses from an investment as long as you don't immediately buy the same stock again (wash sale). So the idea is that you buy a fund that is different enough not to trigger this condition, but similar enough to not shift the allocation of the portfolio. Moreover, multiple funds can make tax loss harvesting easier.

For example, suppose you put all your money into VWRA -- Vanguard's total world ETF. Now suppose that US stocks accumulate moderate gains and European stocks incur some losses (but less than the other gains). As a result, VWRA will gain slightly -- no opportunity for tax loss harvesting. But you could have recreated VWRA with separate funds, one tracking US stocks and one tracking European stocks (and more funds for other regions). As a result, you could then tax loss harvest with the European fund. Why is this useful? At least in the US, the cost basis of your stocks "reset" when you die and others inherit the funds. That is, your estate will never have to pay the accrued capital gains taxes. And, of course, you can go more granular and split total US into large cap, mid cap, small cap, and so on. Even if you need the money during your lifetime, you may simply want to take margin loans against your portfolio. There may be other benefits to holding various smaller funds instead of a large index fund like VWRA. For example, you may get better terms for lending shares to short-sellers, which could generate additional returns.

Your private bank isn't going to have special insights into the market that they're selling you for a 1% management fee. Various funds specialize in acquiring information that isn't publicly available, and they charge a lot more than that (and require longer and larger commitments, so you give up liquidity). But they should be much better informed about various tax implications and other opportunities that make sense with 7-8 digit portfolios. Plus, they might offer useful professional connections through their events. Whether that's worth 1% really depends on what you think you get out of any of that.
steadyosmosis
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Re: My private bank has a lot of funds

Post by steadyosmosis »

tradez wrote: Wed Jan 18, 2023 5:52 pm Full transparency - I have a 7-figure discretionary portfolio with a global private bank. Their fees are about 1% PA + product costs. Breaking down the portfolio I am 60/40 split and it’s made up of about 20 equity ETFs/Funds, and 5 bond funds. They make changes every few months. (Side note: I know this is too conservative given I am in mid 30s)

I’ve spent far too much time now reading about passive investing, and I’m very intrigued to pull the money out and invest it myself. Question I have is why the bank (and most other wealth managers) would invest in so many funds. There must be an advantage to doing this or they would minimize the number/complexity. I don’t believe they do it simply for optics in order to make it look like they are doing a lot. This is a global renowned private bank. There must be advantages.

Keen on your thoughts. I am extremely nervous about pulling the trigger as although it all makes sense on paper, I can’t help but think the bank are professionals and can surely make 1% more than me who has no experience.
Keen on my thoughts?
I think that, thus far, your 'global private bank' has found a good customer.
Mr.BB
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Re: My private bank has a lot of funds

Post by Mr.BB »

Go on to Morningstar portfolio and take the portfolio they created for you with all those funds ( All you have to do is put the funds code and number of shares and even just the current cost) then look at the style blocks that is created to show you how the large, mid and small cap are broken down. I bet you can find a very similar basic 60/40 index fund or even something like the Wellington fund that would match up and cost you way less money.

As to your comment about why they put so many funds together for you, is they do it to make it look complicated.
"We are what we repeatedly do. Excellence, then, is not an act, but a habit."
chazas
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Re: My private bank has a lot of funds

Post by chazas »

OP, I faced a similar situation a few years back. I had moved some of my legacy tax deferred money to a Schwab IRA, but I also had a substantial amount in old and current employer 401Ks. Schwab gave me a “deal” of only .5% for an asset management fee, and I was very unsure of my self so I took it as an experiment.

They used all mutual funda, but they were in and out a lot with small bits and pieces and the funds were actively managed. After a couple of years I looked back at the year end reports and they trailed the indexes by, what do you know, a bit more than their management fee and fund expenses from all those managed funds. At least it was in a tax-deferred account so no tax ramifications from all that incessant tinkering.

I moved that account to their target date fund and didn’t look back. Eventually I ended up learning about the back-door Roth and consolidating all of my old 401Ks and the Schwab IRA at my current employer’s plan, which has low cost Vanguard institutional class funds. After a bit of still using target date funds I ended up switching to component index funds and balancing across all accounts, including taxable.

I’m a lot happier now that I (mostly) know what I’m doing and control trading and expenses. I figure I can’t control the markets, but I can control that.

Give it a try with part of your portfolio, if you want to feel it out. I bet you’ll end up simplifying drastically like I did, and be happy about it.
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TomatoTomahto
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Re: My private bank has a lot of funds

Post by TomatoTomahto »

tradez wrote: Wed Jan 18, 2023 6:57 pm
I am nervous that although I know my AA is 80/20, I could underperform someone else’s or a banks portfolio substantially, simply because they selected a better set of ETFs. What is the perfect portfolio…

If simplicity is best, why doesn’t everyone use a 2 fine portfolio. Is complicating it simply to scratch an itch, or a “what if” but no evidence it outperforms?
You can always underperform someone else’s portfolio substantially. You will always lose out to someone who got lucky. Why doesn’t everyone have a “simple portfolio?” Why does Las Vegas have lots of big buildings? People are stupid and think magically.

My family is employed by “name” financial services companies, mostly in technology. Aside from some special opportunities (which would not be available to a customer, although you’re happier thinking of yourself as a client), we all invest in simple portfolios.

As the saying goes, “If you can't spot the sucker in your first half-hour at the table, then you are the sucker.”
I get the FI part but not the RE part of FIRE.
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andrew99999
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Re: My private bank has a lot of funds

Post by andrew99999 »

I don't know why there were 24 additional posts when the first reponse hit the nail on the head.
chinchin wrote: Wed Jan 18, 2023 5:57 pm
I don’t believe they do it simply for optics in order to make it look like they are doing a lot.
That's exactly why they do it.
To an adviser, complexity = job security.
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Watty
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Re: My private bank has a lot of funds

Post by Watty »

tradez wrote: Wed Jan 18, 2023 5:52 pm I am 60/40 split ....

(Side note: I know this is too conservative given I am in mid 30s)
That could actually be a reasonable asset allocation depending on your situation and what the money is intended for.

For example if you are likely to retire earlier than normal this could make sense. Likewise if the money was an inheritance or a one time windfall and you do not have a high income then that might be a reasonable asset allocation.

A big part of figuring out your asset allocation is to also consider your need to take risk. If you do not have much need to invest more aggressively then have a less agressive asset allocation can also make sense.
tradez wrote: Wed Jan 18, 2023 5:52 pm They make changes every few months.
There can be tax reasons to sell investments that have gone down but that sounds like it is is account churning.

https://www.investopedia.com/terms/c/churning.asp
tradez wrote: Wed Jan 18, 2023 5:52 pm Question I have is why the bank (and most other wealth managers) would invest in so many funds.
If you are lucky it is just closet indexing where they charge you fees to basically just put you in about the same investments as index funds.

https://www.investopedia.com/terms/c/closetindexing.asp

Even if they are not intending to when they buy 20 different stock mutual funds the performance will tend to be like an index fund, except for the costs and fees.

If you are unlucky it is because they are trying to make even more money off of you.

I do not know how it works in your country but in the US there are some investments that financial advisors will be paid a commission for when they sell it even though they may call the payment something other than a commission. Depending on your countries laws these can be hidden and be hard to find.

The sales people may also have quotas where they have to sell a certain amount of investments to keep their job or to get a bonus. They may also have sales incentives like if they can sell a million dollars of some mutual fund they may get a paid vacation.
tradez wrote: Wed Jan 18, 2023 5:52 pm Their fees are about 1% PA + product costs.
Do you even know what all of the other costs are for what what they are buying?

In the US there can be up to a 5% fee called a load where when you invest $100 the company takes $5 and only $95 is actually invested. That is thankfully mostly a thing of the past now but there are still some companies that try to charge that. There can also be high expenses that are 1 or even 2 percent that can sometimes be hidden. Any mutual fund will have some overhead but a with a good index fund that can be something like 0.04% or about $0.04 per $100.

For perspective academic studies have show that when a person retires at 65 that in the past they could have started out spending about 4% of their portfolio each years and have a fairly "safe withdrawal rate" There are lots of details and assumptions about that but the important thing is that if you are were 65 and paying them a 1% fee each year then that needs to come out ot the retirees 4% so they would really be paying them 25% of their spendable income for the year. If they are charging 1% a year and putting you into expensive investments then that makes it even worse.
tradez wrote: Wed Jan 18, 2023 5:52 pm .....
I can’t help but think the bank are professionals and can surely make 1% more than me who has no experience.
...
I have a 7-figure discretionary portfolio
Many mutual funds have several hundred billion dollars($100,000,000,000 US) invested.

If your financial advisor could invest 1% better than an index fund then why are they not working for a mutual fund like that or even a tiny mutual fund that only has a few tens of billions of dollars invested?

I am skeptical that any financial advisor can actually reliably pick investments that will outperform the index funds over the long term but they do exist they are very rare and they would likely be working for people that have a lot more than you or they will have made themselves rich investing their own money and not be working for anyone.

If you are dealing with a large bank then in all their locations they likely have hundreds if not thousands of financial advisors. It is not realistic to think that they could all be above average.

One thing you may find though is that there will be financial advisors who are willing to make larger bets with your money. About half the time they will get lucky just by chance and win the bet and then look like a genius at least for this year. The other half of the time they will still get paid their fees and it may take the client years to figure out they are not getting superior portfolio management or the client may never figure that out.

There is a good chance that your portfolio may have done very well recently but you cannot be sure that was because of skill.

The poor performance might not be easy to spot since in a given year a portfolio might be up 7% which sounds good but index funds might have been up 10%.
tradez wrote: Wed Jan 18, 2023 5:52 pm I am in mid 30s
One great thing is that you could have 50+ years of investing ahead of you so that even if you were paying are paying too much in fees now learning about the importance of high fees while you are relatively young will have big paybacks later. Some people don't figure that out until they are trying to retire and it may be too late.
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SmileyFace
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Re: My private bank has a lot of funds

Post by SmileyFace »

How long has your money been there and much have they been beating the market for you so far (make sure you account for that 1% and the "product costs")?
One advantage to them of buying so many funds on your behalf in addition to the obvious one you don't want to believe (make it look to difficult to the common man to do) is if they are investing in funds with loads they are getting more than the most obvious 1% from you.
Their primary goal is to transfer as much money as possible from your pocket to theirs.
arf30
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Re: My private bank has a lot of funds

Post by arf30 »

I think you're right about the bank's portfolio managers having an edge, the problem is they do it by charging people fees instead of through the market.
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Re: My private bank has a lot of funds

Post by MtnTravel »

The true private banks generally cater to the UHNW, often with mid 8 figure relationship minimums or family offices, so a 7 figure discretionary account likely wouldn’t qualify. I don’t know what bank you’re dealing with, but it sounds like it’s probably the retail arm of a large global bank (UBS?), which are often similar to any other retail asset manager, i.e. high fees for not great performance.

As posters above note, yes you can probably do better by getting rid of active management. But if you have no interest in managing your own investments or you are worried about the behavioral risks of investing on your own, stay where you’re at. It’s better to pay a 1% fee to have someone manage your money than make a big mistake like going all cash in a down market.
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Re: My private bank has a lot of funds

Post by Mr.BB »

Have you calculated how much they actually charge you for
"all their fees" for managing your portfolio? There's a reason these firms do not send out a quarterly bill for you to pay them directly versus taking it out of your portfolio directly. They don't want you to see what you're really paying them.
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TomatoTomahto
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Re: My private bank has a lot of funds

Post by TomatoTomahto »

SmileyFace wrote: Thu Jan 19, 2023 6:42 am How long has your money been there and much have they been beating the market for you so far (make sure you account for that 1% and the "product costs")?
One advantage to them of buying so many funds on your behalf in addition to the obvious one you don't want to believe (make it look to difficult to the common man to do) is if they are investing in funds with loads they are getting more than the most obvious 1% from you.
Their primary goal is to transfer as much money as possible from your pocket to theirs.
And, don't forget to count the tax drag. That might not be a problem recently, with losses, but moving in and out of assets in taxable accounts has consequences.
I get the FI part but not the RE part of FIRE.
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Re: My private bank has a lot of funds

Post by TedSwippet »

TomatoTomahto wrote: Thu Jan 19, 2023 8:17 am And, don't forget to count the tax drag. That might not be a problem recently, with losses, but moving in and out of assets in taxable accounts has consequences.
Not necessarily a problem. The topic author is not a US citizen, and is currently UK resident but expects to move soon to the no-tax UAE.
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TomatoTomahto
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Re: My private bank has a lot of funds

Post by TomatoTomahto »

TedSwippet wrote: Thu Jan 19, 2023 8:32 am
TomatoTomahto wrote: Thu Jan 19, 2023 8:17 am And, don't forget to count the tax drag. That might not be a problem recently, with losses, but moving in and out of assets in taxable accounts has consequences.
Not necessarily a problem. The topic author is not a US citizen, and is currently UK resident but expects to move soon to the no-tax UAE.
Thanks. One of these days I will remember to look up at the top of the page and verify that the investor is US based.
I get the FI part but not the RE part of FIRE.
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Re: My private bank has a lot of funds

Post by TedSwippet »

TomatoTomahto wrote: Thu Jan 19, 2023 8:37 am
TedSwippet wrote: Thu Jan 19, 2023 8:32 am
TomatoTomahto wrote: Thu Jan 19, 2023 8:17 am And, don't forget to count the tax drag. That might not be a problem recently, with losses, but moving in and out of assets in taxable accounts has consequences.
Not necessarily a problem. The topic author is not a US citizen, and is currently UK resident but expects to move soon to the no-tax UAE.
Thanks. One of these days I will remember to look up at the top of the page and verify that the investor is US based.
No worries. I just didn't want the thread to spin off into the weeds of irrelevant (to the topic author) US tax rules.
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NearlyRetired
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Re: My private bank has a lot of funds

Post by NearlyRetired »

I think there have been a lot of good answers to your questions, but here is a question for you (well ok two :oops: ).

What return have your investments made over 1 year, 3 years and 5 years? How does that compare with market average returns for the corresponding periods? Remember to check whether the return you are given is after charges have been taken out or not. That should give you some idea of whether they are delivering value for you
To err is to be human, to really mess up, use a computer
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TomatoTomahto
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Re: My private bank has a lot of funds

Post by TomatoTomahto »

NearlyRetired wrote: Thu Jan 19, 2023 9:47 am I think there have been a lot of good answers to your questions, but here is a question for you (well ok two :oops: ).

What return have your investments made over 1 year, 3 years and 5 years? How does that compare with market average returns for the corresponding periods? Remember to check whether the return you are given is after charges have been taken out or not. That should give you some idea of whether they are delivering value for you
Those are fair questions, but the answers are only meaningful on a risk adjusted basis (or, an appropriate "market average return").
I get the FI part but not the RE part of FIRE.
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Re: My private bank has a lot of funds

Post by rkhusky »

It is likely the bank has some software that takes some input from the client and spits out a set of investments that were optimal over some past time period, whether that is 1 year or 5 years or 10 years. The bank runs the software several times during the year as the “optimal” portfolio changes slightly based on recent performance.
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Re: My private bank has a lot of funds

Post by exodusing »

Watty wrote: Thu Jan 19, 2023 6:35 amI am skeptical that any financial advisor can actually reliably pick investments that will outperform the index funds over the long term but they do exist they are very rare and they would likely be working for people that have a lot more than you or they will have made themselves rich investing their own money and not be working for anyone.
I share your skepticism. A while back I read a lot of research on the subject. There may well be those who can reliably pick investments that will outperform the market. One issue is that the years of data we'd need to figure out if it's talent or luck exceeds the working life of advisors.

Another issue is that those who appear to have talent almost invariably charge fees such that the benefits accrue to the advisor, not the customer. Advisors would be foolish to charge much less.
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tradez
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Re: My private bank has a lot of funds

Post by tradez »

Wow, some extremely valuable responses. Thank you.

I think it would be unfair for me to name the specific private bank I am with, but it is one of the major European players. i.e. UBS, Pictet, HSBC Private, Credit Suisse, BNP Paribas etc. It is not the retail arm, and the investments are not being picked by one of many financial advisors. They have large global teams dedicated to it. They have a handful of discretionary portfolios based on equity/bond AA. I actually have about 80% of my holdings there, and the remaining in more aggressive themes, e.g. Asia, Hedge Funds, Private Credit etc. I can confirm the fee is 1% and I pay this independently, it does not come out of the portfolio. It is extremely transparent and there are no hidden fees as this is extremely highly regulated in the UK.

Here are some historical performance figures. The fixed income element is actually half FI and half alternatives as the bank prefers to be a bit more diverse in asset class, but one can opt to not include alternatives and for it to be pure fixed income. The portfolios keep approx 2% back in cash as well.

Image
DoctorE
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Re: My private bank has a lot of funds

Post by DoctorE »

tradez wrote: Thu Jan 19, 2023 6:06 pm Wow, some extremely valuable responses. Thank you.

I think it would be unfair for me to name the specific private bank I am with, but it is one of the major European players. i.e. UBS, Pictet, HSBC Private, Credit Suisse, BNP Paribas etc. It is not the retail arm, and the investments are not being picked by one of many financial advisors. They have large global teams dedicated to it. They have a handful of discretionary portfolios based on equity/bond AA. I actually have about 80% of my holdings there, and the remaining in more aggressive themes, e.g. Asia, Hedge Funds, Private Credit etc. I can confirm the fee is 1% and I pay this independently, it does not come out of the portfolio. It is extremely transparent and there are no hidden fees as this is extremely highly regulated in the UK.

Here are some historical performance figures. The fixed income element is actually half FI and half alternatives as the bank prefers to be a bit more diverse in asset class, but one can opt to not include alternatives and for it to be pure fixed income. The portfolios keep approx 2% back in cash as well.

Image
Been in your shoes and I chose to run like wind. The particular bank I used made it a point to make finding returns/fees and reports a pain in the a** on top of the crazy turnover and terrible execution pricing.

So those returns are before the 1% fee but after the fund fees?
What's the turnover of the portfolio annualy?
Are you a non-dom and do you not pay Capital Gains Tax on it?

Here's what a simple two fund portfolio would have done in USD after fees:
USD 60/40 - VT/BND - 1.51% 3Y, 3.32% 5Y, 5.43% 10Y

Unless you are using some exotic loan products at very low interest rates from the bank, I would read up into managing your own portfolio bogle style.

https://investor.vanguard.com/investor- ... t-of-costs
HKexpat
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Re: My private bank has a lot of funds

Post by HKexpat »

The 100% Stock Pick portfolio at 7.8% annual return is easy to compare with VT, Vanguard's globally diversified index fund. From Europe, you would invest through the Ireland-based ETF version VWRA -- same return, but it's not been around for 10 years, so let's look at VT's historic return. In the past 10 years, it had a return of 8.14% per year. So even before the 1 percentage point fee, a globally diversified index fund outperforms the banks' stock picks.

If you invested $10m in 2012, you would have about $22m with the index fund and $19m with their actively managed fund (after the 1 percentage point fee). Not a strong selling point for the bank, given that the turbulence of the last years might have been especially favorable for a skilled funds manager to navigate.

If you're getting value from tax services, networking events, and other features unrelated to the funds' performance, then this may be worth the money. After all, networking is an important part of professional and personal life, so why not spend money on access to invitation-only events? $100-200k/year is not outrageous with a portfolio of that size. But if you're with them because you expect better performance vs. the index funds available to all investors, I don't think that's likely to pay off. The promise of "exclusivity" and "prestige" is a common marketing feature -- just be mindful that this is (part of) what they are selling. If it costs $20k to fly someone from Europe in on a private jet and convert them to a client they can charge $100k/year in management fees, why wouldn't they do that?
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Re: My private bank has a lot of funds

Post by DoctorE »

HKexpat wrote: Thu Jan 19, 2023 9:48 pm The 100% Stock Pick portfolio at 7.8% annual return is easy to compare with VT, Vanguard's globally diversified index fund. From Europe, you would invest through the Ireland-based ETF version VWRA -- same return, but it's not been around for 10 years, so let's look at VT's historic return. In the past 10 years, it had a return of 8.14% per year. So even before the 1 percentage point fee, a globally diversified index fund outperforms the banks' stock picks.

If you invested $10m in 2012, you would have about $22m with the index fund and $19m with their actively managed fund (after the 1 percentage point fee). Not a strong selling point for the bank, given that the turbulence of the last years might have been especially favorable for a skilled funds manager to navigate.

If you're getting value from tax services, networking events, and other features unrelated to the funds' performance, then this may be worth the money. After all, networking is an important part of professional and personal life, so why not spend money on access to invitation-only events? $100-200k/year is not outrageous with a portfolio of that size. But if you're with them because you expect better performance vs. the index funds available to all investors, I don't think that's likely to pay off. The promise of "exclusivity" and "prestige" is a common marketing feature -- just be mindful that this is (part of) what they are selling. If it costs $20k to fly someone from Europe in on a private jet and convert them to a client they can charge $100k/year in management fees, why wouldn't they do that?
Well said.

The OP is "lucky" in enough to seem to have invested only in their plain vanilla strategies.
I was convinced, before educating myself, in trying all sorts of structured products, managed futures, private funds, hedge funds and such. In the end, none of them outperformed a lazy B&H over a decade. I would not even bring it up to the bank as to why because they are scripted and trained salesmen to convince you as to why there's still value in underperformance.

I disagree with the 'access' to events part. Most are bank marketing events and tickets you could buy yourself or through a concierge service.
$100k fee is more like $200-$250k on $10M because of all the other added extras. I won't even go to the dividend fees they charged and FX markup. Robbery. If you want to 'mingle, can take the $100k-$250k a year, join the Monaco Yacht Club, Country Club and fly business to the F1/Yacht Show. You'll meet plenty of other people with and without $ that are willing to 'do business'.
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Watty
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Re: My private bank has a lot of funds

Post by Watty »

One more thing.

If you have not seen it yet there is a Getting Started for non-US investors wiki that you might want to go though to learn more about investing.

https://www.bogleheads.org/wiki/Getting ... _investors

Even if you choose not to manage your own investments it would be good to learn more so that you can understand and ask better questions about what is going on with your investments.
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tradez
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Re: My private bank has a lot of funds

Post by tradez »

DoctorE wrote: Thu Jan 19, 2023 8:18 pm
Here's what a simple two fund portfolio would have done in USD after fees:
USD 60/40 - VT/BND - 1.51% 3Y, 3.32% 5Y, 5.43% 10Y
You raise an interesting point, but there are still choices to be made as to whether you choose a US-heavy Large Cap, All-World, Emerging Markets etc. All have performed differently, and an adviser would argue they can use tactical allocation to move things around if there is a macro need too. My bank has suggested 1% uplift for TAA.

As it so happens, this thread has no doubt convinced me that I should go down the bogle route (should I expect anything less from this forum!) and my mind is moving towards IWDA + EIMI. Unless I am analysing it incorrectly, it seems like the iShares MSCI World Index has performed better than the FTSE Vanguard All World. The US Cap heavy has of course performed the best in the long run (S&P500)
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tradez
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Alternatives or No Alternatives

Post by tradez »

[Thread merged into here --admin LadyGeek]

My private bank strongly believes in investing in alternatives in addition to fixed income to ensure a diverse set of investments.

The traditional fixed-income elements of their discretionary portfolios actually have a portion of alternatives. For example, in their 60/40 portfolio, 40% is actually made up of 25% fixed income, and 15% alternatives (hedge funds and commodities).

It is an interesting angle, as it has as an example offered some protection in the last year when fixed income declined.
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TomatoTomahto
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Re: Alternatives or No Alternatives

Post by TomatoTomahto »

You are a wonderful customer.

Imo, you aren't in a category to need alternatives (eg, college endowment, family office, etc).
I get the FI part but not the RE part of FIRE.
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JoMoney
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Re: Alternatives or No Alternatives

Post by JoMoney »

My fixed income did great last year, but the "alternatives" didn't involve hedge funds, it consisted of Series I Savings Bonds and a Stable Value fund.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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tradez
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Re: Alternatives or No Alternatives

Post by tradez »

TomatoTomahto wrote: Fri Jan 20, 2023 7:58 am
Imo, you aren't in a category to need alternatives (eg, college endowment, family office, etc).
Why would the category I am in matter? Looking after money is the same regardless of wealth. That being said, I have a fairly large portfolio with them, although soon to be reduced as I have been convinced by the forum! :)
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