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Wednesday, 11 June 2008

Secret doors to special deals

I went 'undercover' and discovered special products with better than usual returns
By Larry Haverkamp (Doc Money)

THIS is the year of the pig, which is a misunderstood animal.

It isn't really lazy. In fact, it is good at making money. But can it boost its earnings even more with the help of a private banker?

You need to deposit about half a million dollars to open a private banking account. That excludes most of us.

Are we missing anything?

Do private bankers really have a money-making formula not available to the rest of us?

Last week, I set out to find the answer. I took my most exclusive mystery shopping trip to visit private bankers and see if they really are so great.

A friend, who wants to be known only as Kelvin, is one of his bank's 200-plus private banking clients.

He let me tag along as his 'adviser'. We met his bankers at their Shenton Way headquarters.

SPECIAL TREATMENT

A receptionist took our names and escorted us to a waiting room. It was pure luxury. Even the walls were carpeted.

A sexy girl with one of those slits in her skirt came up and introduced herself as Ms Wong.

She asked what we would like. My friend, Kelvin asked, 'What do you have?'. She said, 'Anything you like, sir. Just ask.'

Whew. As we were contemplating the implications of that, a no-nonsense older lady showed up and said, 'Gentlemen, you may see your private bankers now. Follow me.'

We followed and she walked straight into the carpeted wall. She gave it a little push and, incredibly, it swung open. It was a concealed door that opened into a long corridor with small conference rooms on each side.

These were not the kind of rooms where you could get anything you like. There were no sofas and no karaoke, just a table and chairs.

We took a seat, someone served us tea, and private banker No 1 arrived. This guy wore the perfect suit with the perfect tie. He looked like he had just stepped out of an ad for private bankers.

Kelvin introduced me as his financial adviser which seemed to worry Banker No 1. He said clients usually didn't bring along financial advisers.

Maybe he thought I was a financial columnist on a mystery shopping tour. Of course, that's what I was.

Private bankers work in teams of two. One is the salesman and the other is the brain.

The brain entered five minutes later with a pile of papers under his arm. He didn't wear a tie and his shirt wasn't tucked in. He looked like an absent-minded professor.

He launched into an explanation of their investments like unit trusts, investment-linked products, structured products, hedge funds, private equity funds and more.

After 15 minutes, I said: 'Excuse me. This is interesting, but my friend Kelvin can buy any of these at your public lobby on the first floor. Do you offer anything special up here?'

At that point, the brain looked at the salesman and said: 'Heavenly?'

The salesman answered: 'Yeah. Show them Heavenly.'

The brain handed us two white brochures from the bottom of his stack of papers and launched into a new sales pitch. It soon became apparent this was a structured product with returns linked to the US Nasdaq stock index.

But it was more than that. It was the 'other side' of a structured product - the side taken by the issuer, in this case a large European bank.

Issuers begin their work by structuring a 'fair deal' product. It might limit the downside to, say, a 2 per cent annual return and cap the upside at 8 per cent.

Then, the issuer adds something for itself. Supposedly, it compensates for risk, but it also includes a profit.

The effect of the issuer's risk/profit cushion is to reduce the minimum and maximum returns the customer gets. Instead of 2 to 8 per cent, the customer might get 0 to 6 per cent.

For many types of products, this cost is included in the price structure and is invisible to buyers.

BETTER RETURNS

For the issuers, the added cushion turns a fair deal into a very good one. The seller can still suffer a loss if the market drops sharply, but the cushion increases expected returns and reduces the risk of loss.

The issuer's side of this structured product earned a whopping 39 per cent last year.

Of course, you need a private banker to get it since there is no way you could partner an issuer or big bank on your own.

I quickly advised Kelvin to take it. Sure enough, he bought half a million dollars of Heavenly 'for starters'. He said he would buy more if it earns 39 per cent in 2007, as it did last year.

Everyone left happy. Except me. I felt a bit grumpy, thinking about the unsuspecting customers down on the first floor buying structured products. They are the ones paying for the higher returns available to issuers and their associates, like Kelvin.

On our way out, I looked for Ms Wong. She was nowhere to be seen. That made me even grumpier.

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