Part 4: Financial security for all: the best way to predict the future…

For the past 40 years I have been Managing and Controlling Wealth for Shareholders and then High Net Worth Individuals. Providing Wealth Management services to High Net Worth Individuals pays well and is a growing market.

Wealth Management is a well defined advanced investment advisory discipline that incorporates financial planning and specialist financial services. The services that fall under Wealth Management are extensive and the key objectives are to provide high net worth individuals and families with tailored services, legal resources, taxation advice, investment managers’ selection, estate and tax planning, book-keeping, 3rd party fees monitoring, concierge support and many more. The goal is to sustain and grow clients’ long-term wealth.

Private Bankers, Asset Managers, Investment Managers, Hedge Fund Managers are principally looking at the Investments of the clients. And they charge a fee for doing that.

Whereas financial planning can be helpful for individuals who have accumulated wealth or are just starting to accumulate wealth, one must already have accumulated a significant amount of wealth for the wealth management process to be effective. So says the specialists.
Hence the distinction.

Financial Planning is one aspect of Wealth Management being at the lower end of the Wealth Meter. In general usage, a financial plan can be a budget, a plan for spending and saving future income. This plan allocates future income to various types of expenses, such as rent or utilities, and also reserves some income for short-term and long-term savings. A financial plan can also be an investment plan, which allocates savings to various assets or projects expected to produce future income, such as a new business or product line, shares in an existing business, or real estate.

The reality is that both segment of this Wealth Management market have been run by intermediaries. Rather than invest direct through a stock broker, the investor goes to a Financial Planner or a Wealth Manager to get alpha for which he pays an annual fee ranging from 75 basis points to 400 basis points.

There are certainly champions out there who do add value but the reality is that most managers do not beat the market. If you use one such specialist then, next time you have a meeting see what is disclosed in the reports and analysis you get specially when it comes to fees or performance vs benchmark.

Let me share with you a compilation of annual analysis of performance by asset classes that Goldman Sachs compiles called “Why diversify?” covering the period 2002 to 2012. I have analysed the results over that period to look at cumulative annualised performance.

Acknowledgement: Goldman Sachs

SOURCE : MSCI, Bloomberg, LehmanLive, CSFB/Tremont. Indices: USD Debt – JP Morgan US1-10 Index; High Yield –Lehman US Corporate High Yield, US Equity – S&P 500, Europeen Equity – MSCI Europ, Japan Equity – MSCI Japan, Hedge Funds 10% Relative Value (Convertible Arbitrage 40%, Equity Market Neutral 40% and Fixed Income Arbitrage 20%), 35% Event Driven, 20% Tactical Trading, 35% Long Short, Property GPR250 Global, Commodities – GSCI.

All the indexes are unmanaged and do not reflect management fees, brokerage and commissions.
After analysis of the results over a 11 year period I found that:

• The table by performance changed each year sometimes quite significantly for example Emerging Equity made 39.8% in 2007, lost 53% in 2008 and made 79% in 2009 overall over an 11 year period made 14.59%. Turn out to be the best performer over that period. But at a highest risk.
• Equal investment in each category would have generated IRR of 7.46%;
• Picking the highest performer each year would have generated an IRR of 35.42%; (if you are able to do that then please contact me and we will set up a hedge fund and make billions!)
• Sticking with 1 category of investment would have generated High 14.6% (Emerging Equity) and Low of 0.95% – (Japanese Equity) and
• Average of all categories give an IRR of 6.63%.

The performance by each class over 11 years were IRR of:

Aggressive Portfolio6.13%

Commodities5.12%

Conservative Portfolio6.51%

Emerging Equity14.59%

European Equity3.05%

Hedge Funds6.82%

High Yield Bonds9.25%

Japanese Equity0.95%

Moderate Portfolio6.60%

Property11.77%

US Debt4.73%

US Equity4.05%

Bearing in mind that all these performance are before management fees, the best one would have done is 14% in Emerging Equity if you had invested in 2002 stick with the loss of 53% in 2008 and loss of 18% in 2011. Also would you have stayed invested after the gains of 79% in 2009.

The performances by asset class show how difficult it must be for anybody to predict the future high performer.

In 2012, the UK Observer ran a contest comparing the performance of investment managers who had invested in the best stocks they could find compared to a cat named Orlando which had randomly chose stocks from a list. The cat won.

“While the professionals used their decades of investment knowledge and traditional stock-picking methods, the cat selected stocks by throwing his favourite toy mouse on a grid of numbers allocated to different companies.”

JACOB GOLDSTEIN writing on that article concluded: “once you take into account things like management fees and transaction costs, actively managed mutual funds that try to beat the market typically end up doing worse than index funds that passively track the overall stock market.”

So what is the best way of predicting the future. Take your financial future in your own hands, do not expect any wealth manager or financial planner to make YOU rich. If they could predict the future, would they really need your money to make money?
What is certain in life is uncertainty. So expect uncertainty and provide for yourself and your family in the surest way possible: Spend less than you earn and certainly no more than 4% of your net worth. Decide on your financial objectives and then to implement it you use professionals who are paid by you to assist in specific domain of your choice but certainly not putting your destiny in their hands.

Alternatively try to get an appointment with Orlando, the cat………………….