Is the ‘classic private banking model’ fit for purpose?

It’s been a while since I’ve posted here, but things are settling down now. The past few years have been personally very challenging and very busy (injury, bereavement, house renovations and more) so the blog has unfortunately taken a bit of a back seat. But I am now hoping I can make a more concerted effort to keep the website up-to-date with topics from the world of personal wealth that we find interesting.

 

So perhaps I’ll just jump in at the deep end and comment on an article that has been published in today’s Financial Times under the headline “UK private wealth portfolios down by up to a third.” [for which you’ll need an FT subscription to access]

 

We have been harping on for a while about how the ‘classic private banking model’ is broken – see our article from nearly FOUR YEARS AGO – passing comment on the exact same data that the FT is now criticising. It’s nice to see things getting better scrutiny, although the FT may need to pick up the paces a little.

 

It is depressing to see that “traditional wealth managers” (I use the quotation marks to help stress that we do NOT consider ourselves to fit this definition), having performed badly up until 2019, have had a torrid time in 2022. Lo and behold, their performance between 2019 and 2022 has been equally disappointing. Their clients should be cross.

 

In the ten years to 30th September 2022, the average private bank/traditional wealth manager/discretionary fund manager delivered a return after fees of +80.6% (for their ‘equity risk’ category). Whereas the MSCI All Countries World Index* delivered a return of 191.3%. Time for a shocked face emoji.

 

Now, to give them as much benefit of the doubt as I can muster, wealth managers are likely to complain that this is not a totally fair comparison. Not least because they are more UK-focused and the UK stock market** has been one of the worst performers over the past ten years. But perhaps also because investing full tilt, 100% in equities is perhaps a bit foolhardy and better risk-adjusted returns are available. I don’t disagree with either of these points.

 

But even if we control for these points, by spreading the investments across an index of 30% FTSE All Share, 60% MSCI ACWI and 10% Barclays Global Aggregate Bond Index, the performance would have been 133.8%. Still miles away from what the average private bank/traditional wealth manager/discretionary fund manager has delivered.

 

And if we dig a bit deeper and try to identify the best of the breed (the real crème de la crème as the FT calls them), the Top Quartile performer in the ARC data delivered a mere 93.4% over the same period. Still forty percentage points below where it should be. And that’s with the benefit of hindsight, as it is impossible to identify who is going to be top quartile in advance, despite what they might tell you.

 

Perhaps there’s another article for another day to discuss how and why we believe this comes about.

 

 

Please note, past performance is not a reliable indicator of future results.

 

*MSCI All Countries World Index IMI NR USD Index, to be precise
**FTSE All Share TR Index