Wealthy investors receiving low-quality advice, says research

Mystery shopping excercise by Private Banking Prüfinstanz finds few private banks qualify as 'very good'; RDR has had little effect on numbers of IFA clients, says poll; SGPB quarterly review outlines the 'credit clock'; Markit predicts rising dividends in Europe

An elderly Asian couple posing as wealthy investors visited 18 Swiss-based banks recently on behalf of Private Banking Prüfinstanz with the aim of ranking wealth advisers. Only one of the banks the couple visited, Schroder & Co Bank, emerged from the test with a ranking of ‘excellent', while four were ranked as ‘very good'.

The couple visited the banks pretending to seek advice on investing a fortune of $14 million. They said part of the money was to be used to assist their children, who were studying in London and New York. Another part was to be used to purchase a property, while a third was to be designated as a hidden asset. The couple also requested that the banks assist with various services, including locating a property in London.

Schroder stood out for its expertise and the personalities of its consultants, according to the research. The four banks ranked ‘very good' were Barclays, Liechtensteinische Landesbank, Morgan Stanley and Pictet & Cie.

 

Just over half of UK financial advisers have reported no significant change in the number of active clients they do business with in the wake of the Retail Distribution Review (RDR). According to a poll run by multinational insurance company Aviva, 55% of advisers have seen no change, while more than one quarter (28%) have seen an increase in their active client base.

The RDR was enacted by the Financial Services Authority - now superseded by the Financial Conduct Authority - at the end of 2012. Among the new rules was a ban on independent financial advisers (IFAs) receiving commission on certain products. Although the Aviva research reveals the IFA business has not been impacted as negatively as industry participants predicted, the figures could reflect an exodus from the industry. Almost one third (29%) of advisers said they are getting new business from investors ‘orphaned' by their former IFA, while 52% said new clients consist of people seeking financial advice for the first time. The survey ran in September and gathered responses from 1,231 advisers.

 

A study conducted by finance professors Alessandro Beber, from Cass Bussiness School in London and Christophe Pérignon, from the HEC Paris School of Management, has analysed the consequences of banning derivatives in asset management. Derivatives' opponents base their arguments on the belief that the instruments are excessively complex, opaque, unregulated and are used by investors lacking in financial competence. As a result, many have called for them to be banned from certain activities, including asset management. However, they are widely used by the industry: According to a recent Morningstar survey, 27% of US mutual funds reported at least one derivatives holding, with mutual funds in Europe making even larger use of them. If derivatives were to be banned, the researchers conclude, transaction costs and suboptimal risk management strategies would increase, penalising performance for end-investors.

 

The "credit clock" is ticking, and some regions will benefit from it while others stand to lose out, says Société Générale Private Banking in its most recent quarterly view. According to the bank, the credit clock is what drives asset prices around the world, since credit is the engine of modern financial cycles. Where a country stands on the clock face can give investors an idea of where asset prices are heading in the near-term. Occupying the "sweet spot" on the credit clock is the US, which is entering a period of economic growth and credit expansion, which translates into rising asset prices. In the UK and Japan, where credit growth remains idle, asset prices will stall without a boost in lending, says the report. China, meanwhile, is so far ahead of everyone else it will soon turn the corner into credit contraction. But the true laggard is the eurozone, where growth may have bottomed out but recovery is far from certain. Investors waiting for asset prices to lift there will be waiting a long time indeed, the report concludes.

 

Markit has predicted that dividends in Europe this year will thrive. The firm says that ordinary dividends from the UK's FTSE 350 companies are expected to rise 5.3% in the current financial year, with total payouts reaching a total of £89 billion ($142 billion). The main contributors to the UK's dividend payouts are banks, healthcare and oil and gas companies. European dividends from companies included in the MSCI Europe ex UK index are expected to be €186 billion ($253 billion), an increase of 1.5% compared to the previous fiscal year. According to Markit, Swiss and French banks are driving the growth, led by Crédit Agricole and Credit Suisse, while Telefonica's resumption of dividends, worth over €3.4 billion, will lead the telecommunications sector higher.