October 19, 2015

A good friend of mine runs a pretty popular local investment website on bond markets. She has since given up on her personal crusade to educate, elucidate and enlighten local readers on the nooks and crannies in what she considers a flawed marketplace, and has, ironically, gone back to work in that place.

To what and to whom did she owe the duty of care? Nobody. She just felt an obligation to speak up when others would not or could not and the need to share some of her views and observations with the public, to nurture a community of investors and hopefully breakeven in her efforts.

The subject matter of the duty of care is a deviously limp one, no matter how much effort is spent on drilling the concept into bankers or rather, spent on drilling the idea into the marketplace that the concept has been drilled into bankers. Pardon the cynicism.

Legally, the “duty of care comes” with the protection of “just and reasonable grounds”, which is hardly definable by rules of any sort and provides a big cover for certain levels of genuine ignorance which we are sure that cannot  be main criteria for the selection of customer facing bankers after the the usual criteria of personal grooming or the more important criteria of the customer pool?

Ignorance is no excuse, however, to the disadvantage of the ignorant clients who cross the line over to become accredited investors whose ranks are swelling as commercial banks join in the race on the client acquisition rampage after the success of private banks in the wake of the financial crisis.

On the home front, Singapore is seeing an explosion in the “mass affluent segment” with previously ordinary bank accounts now targeted by the wealth management business. This segment is generally recognised as accounts holding between $100k to $ 2 mio and local banks have seen their incomes from wealth management triple since 2010.

Shareholders demand it, noting that with Credit Suisse’s new CEO Thiam, “Pundits and analysts reckon Mr. Thiam will bolster Credit Suisse’s capital, and shrink its relatively expensive investment bank to focus more on wealth management. That kind of program would mirror changes in recent years at UBS AG, which has earned Credit Suisse’s Zurich-based rival plaudits and a stronger share price performance.”

Branches are closing, investment banking units shuttered, trading desks shrunk down as banks hire more private bank relationship managers, better and more pleasingly termed now as wealth managers.

Rolling the red carpet to the former retail investor, giving them a relationship manager, all out to please, and the perks such as, limo rides to the airport, has been mighty successful not only for banks’ incomes but profitable for customers who find a whole new array of products opened for them to invest in.

All is well when times are good and the rising tide lifts all boats but Singapore was rocked this week by the announcement of the potential debt restructuring of a SG dollar bond, something which has not happened before, except for Lehman Brothers SGD bonds (and some Bintan debentures), in her short bond market history. Clients comfortable in their little SG dollar bond world where only the sophisticated would get burnt by those nasty high yield bonds in USD and other currencies.

Accusation and insinuations flying, we hear stories of how the Trikomsel bonds were mis-marketed to clients who were awarded high levels of leverage to buy them; and insinuations that some “preferred” clients were actually tipped off to sell their holdings when were then hawked to clients of other bankers as many banks themselves cannot buy this paper.

With S$215 million worth of bonds out there and an estimated 90% held by retail and private bank clients, the Singapore bond market would appear to be on the brink of her own mini Milken moment (more on Michael Milken).

I remember how my friend lamented to me last year that her suggestion to buy a new HDB 7Y 3.008% bond last year went mostly unheeded, for only 2 people went in. This was mainly due to the fact that virtually no retail folks were aware of the deal which did not pay a sales commission to bankers. Her friend’s father only managed to buy the paper because he questioned his banker about it. Ironically, HDB secured a Aaa rating from Moody’s on the 15th of October, the same day Trikomsel announced their potential restructuring. The bond has since returned over 8% in 18 months, which is just as good as any high yield bond.

To give credit to the private bankers, most of them were also unaware of the HDB bond deal because it paid no commission and far removed away from the market as they are, for private bankers sit at desks and not dealing rooms, they just did not get word about it. All they receive are daily summaries and “axes”, which are stuff that are priced to sell or buy, backed by recommendations which could also include bonds that traders did not want.

As far as the duty of care responsibility goes, that it sufficient to stand in anybody’s eyes. And it a fine balance between driving profits for the bank and the client.

Good private bankers command big AUMs and these days, it takes about US$250 mio to get a director level job. These private bankers hobnob with company owners themselves with their connections just as there are private bankers to bankers, bank traders and such. The bigger clients are the bread and butter accounts and it is justifiable that bigger clients get better service, just as an unverified story goes that a company owner managed to get rid of an impossible-to-sell bond the other day, when other clients have been waiting for many weeks to sell their holdings.

The preferential treatment exists everywhere as one high frequency fund tells me that they pay the SGX a fee for priority execution status and other exchanges in the world offer such services which can extend to precious seconds during a turmoil.

Dissatisfaction on the rise with their banks and their bankers in the developed markets, we are seeing the rise of robo-advisors, a nascent technology in the area of Fintech (“a line of business based on using software to provide financial services”).

23 April 2015 “(Reuters) – Charles Schwab Corp’s automated investment product has attracted $1.5 billion of assets in over 23,000 accounts in its first six weeks, about 20 percent of whom are new clients..” 

Wikipedia defines Robo-advisors as “a class of financial adviser that provides portfolio management online with minimal human intervention”. 

Besides Charles Schwab, Fidelity and Vanguard rolling them out, we have independent firms leading the way such as Betterment, Wealthfront and Wise Banyan. Forbes has a list of the 7 prominent robo-advisory firms out there. 

While algorithms are supposed to be based on traditional portfolio management theory, investors find that products are mostly skewed towards ETFs, probably based on programmed rules.

Singapore has some purportedly online financial advisory firms that may not stand up to scrutiny given their heavy slant to insurance and fund management products which leads us to wonder about the algorithms behind them.

Dissatisfaction with bankers is also prompting regulators worldwide to push for transparency, particularly in the opaque world of OTC products such as bonds, requiring mark-ups to be capped, the details summarised here

It is especially intimidating to be a private bank or priority client if we consider that there are only potentially 34 million customers in the world with assets > US$ 1 million which would qualify them to be private or at least, priority banking customers (the hurdle is higher for private banks – to own US$ 5 million), according to the latest Credit Suisse World Wealth Report. This means there are only 34 million end customers to sell that bond to if no fund or institution would take them, excluding the 120,000 folks who have US$ 50 million to ensure some form of preferential treatment or have their own personal fund managers?

Perhaps the Milken moment is part of the growing up process for us. Perhaps we will realise that the duty of care lies within us and not with someone else. Perhaps clients will tire of the fluff and the free mooncakes and peaches from Korea or durian parties. Perhaps they will find hedge funds appealing as my friend did. Perhaps markets will soon have robo-advisors who will not discriminate. And the big PERHAPS for all the Trikomsel bond holders out there, justice will be served.