A friend of mine has most of his assets with a private wealth management group at a large financial services institution. I have no idea how much my friend is worth, but I do know that the minimum account size at this private wealth group is $25 million, and that they have managed his money for 8+ years.
A few months ago, The India Fund (IFN) announced a rights offering for current shareholders. This offering allowed current shareholders to purchase additional shares of IFN at a 5% discount to net asset value at a ratio of 3:1, i.e. for every 3 shares you own, you could purchase 1 additional share at the discounted price. Since IFN's premium was already 20+% over NAV at the time, this seemed like a no-brainer, instant free money. Although there was a little risk that IFN's price would drop closer to the NAV because of this offering, I mitigated this risk by waiting until the end of the offering period before exercising my rights. At that time, I was also offered an oversubscription priviledge which would allow me to pick up additional shares from those investors who chose not to exercise their rights. Since there was no limit to the number of shares I could request, I asked for 3x more additional shares on top of the ones I was exercising.
At the same time, I knew my friend was invested in IFN also, so I reminded him to exercise his rights, thinking that probably not everyone reads those prospectuses that gets sent out by the brokerage firms.
IFN's premium never narrowed down to the NAV price, and I got all the shares I requested (I had not expected to get any, thinking no one would pass up their rights to buy more). Once I got the shares in my account, I sold all my new shares for a quick 25% profit in less than a month. Of course, at the time I wondered, why didn't I request even more shares, it seemed like such an obvious decision.
When I spoke again with my friend, I found out that he did not even exercise his rights. Why? He didn't spend time reading the prospectus and had spoken with his account manager for advice. This account manager had advised him not to exercise his rights. I was really dumbfounded, and couldn't understand why. Since typically these account managers provide the same advice to all their clients, there must have been many more IFN shareholders who did not exercise their rights, which is why I was allocated all the additional shares I requested. I even wondered if my friend's financial institution itself was somehow profitting from this bad advice, possibly picking up the discounted shares, but I can't imagine they would violate their fiduciary responsibility like that.
Just goes to show you, even the wealthiest people get brain-dead advice.
I am in the process of interviewing more money managers now, and since I already have an account at my friend's institution, I interviewed a manager there also ($1 - $25 million accounts) for almost 3 hours. Unfortunately, so far I feel that even as a beginner I know more than these guys about money.
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My mother has a net worth in the $2-3million range and I act as her financial adviser. My aim has been to try to reduce everything to the minimal hassle possible for her by finding a comprehensive money manager. In 2003 we opened an account with Citibank in London and initially we were allocated a manager who had some good suggestions. But then things rapidly deteriorated with clueless rapid turnover staff. We are now shifting our primary account to UBS hoping to get more consistent service as well as opening an account with another broker in her home country (not US or UK) who invests in the US. I guess the bottom line is - if these account managers were actually good at managing money they would get a job at a mutual fund managing much more and then graduate to a hedge fund getting higher fees... so the best you get is someone who is a good salesperson and the worst is clueless.
Thanks for the comment, Moom.
The financial advisor I spoke with has been with his employer for over 20 yrs. He went through the '87 crash, seems to be well-qualified based on certifications and lots of continued education. He manages 275 households (way too many) with $1M minimum. Like Merrill, he also showed me his own account statements. Immediately, I recognized he has only been invested in stocks since 2003. From the mid 80's to 2003, all of his assets were tied up in real estate. I guess he wasn't drinking his own kool-aid.
Hey Moom & R2R, respectively,
Your comments are excellent. I am an int'l private banker at Merrill Lynch, who concentrates on international clients, so please take everything I say with a grain of salt.
First, to the India Fund: I agree that most private wealth managers excel at sales but do not excel at analysis. Having said that, there may be a reason why the advisor did not suggest buying or selling, namely the portfolio allocation was well balanced at the then present amount. Conversely, the non-trade advice may, as you suggest, have been motivated by internal incentives, or, as you suggest, just laziness/stupidity.
Progression of talent: I do not disagree with your comment on the industry as a whole, however, I would suggest that there do exist a few excellent private wealth managers in the business. I do agree that even within my business unit, I have met only a few other private wealth managers who can analyze. Incidentally those persons are not the most highly compensated persons in the food chain.
Thanks for the comment, anonymous. I am certain there are some excellent private wealth managers out there. I just wish I could find the right one! Hard to evaluate without knowing them for years, anyone can present a good interview...
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