Private bank accounts are not as safe and discreet as you think

Political instability, together with market volatility, can destroy your wealth. Putting your money away in an offshore private bank may seem an attractive option, but it is not as safe or discreet as you think. Many politicians and their families have secret offshore accounts, unlike entrepreneurs who mainly concern about capital appreciation, politically exposed persons view secrecy as their number 1 concern.

Private banks usually assign codes for your account, traders or other operation staff do not have access to your true identity. Only your private banker and his assistants know who the account beneficiary is. But low risk doesn't mean no risk. If your money is undeclared, don't be surprised if someone tips off the regulatory bodies.

The Provider Selection Process / "Beauty Parade"
When several private banks are called to compete for an account, your identity is exposed to all the parties involved. While scrupulous private bankers will keep your identity confidential whether they are successful in winning your account or not, unethical private bankers may tip off regulatory authorities anonymously if your money is undeclared.

KYC - Know Your Customer Initiatives
Reputable private banks generally refuse to accept money from undeclared sources, as the risk of reputational damage far outweighs the the management fees received. You must bear in mind that the bigger the size of the bank, the bigger its opportunity cost to accept questionable money. Therefore,most large private banks have a dedicated team of compliance experts to examine your background to ensure you obtained your money legitimately, the process is known as KYC or "Know Your Customer", it allows banks to identify and profile the beneficial owners of private bank accounts. In the U.S., KYC is not required by statue or regulation, although most private banks adopt this procedure.

If your money is undeclared, you should know which institutions signed the The Wolfsberg principles. The Wolfsberg principles aim to prevent money laundering and counter terrorists financing, and are signed by 11 financial institutions, including Banco Santander, Bank of Tokyo Mitsubishi, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan Chase, Societe Generale and UBS AG. Although some may dismiss the signature as a pure PR exercise, you should know that these private banks do have basic anti-money laundering procedures.

Confidentiality Waivers
You may have signed it and you don't even know about it. Certain private banks include a confidentiality waiver clause as part of the account opening form. Before you sign the contract, check whether such clauses exist.

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Too many choices can spoil your money: How to choose the best private bank

Choosing an appropriate wealth management firm for your money is an important business. Many unscrupulous client advisers just want your money, and have no strong interests in managing it well. Sometimes private bankers have the best of intentions, however they are too preoccupied in winning new business and delegate most of the daily work to junior, inexperienced bankers and assistants. Their assistants are sometimes way too green and incompetent on an operational level, as a result you may experience slow responses, missing trade confirmations or worst, sub-par investment advice and wrong trade execution. As an individual who has worked in the investment banking and private banking industry, I can tell you firsthand the difference a competent adviser can make to your money.

Why do you need a private banker?
You want someone who has the ability to grow your money, to attend to your unique financial needs, and to offer you customized lending solutions that retails banks don't. You're not looking for friendship. Most private bankers go through extensive training to be able to act friendly 24/7.The way to choose a private banker is not to look for the one that you think is the most likable but to focus on concrete qualifications. Check whether your adviser has the following charters:

Chartered Accountant
Certified Public Accountant
Chartered Financial Analyst
Certified Financial Planner

In addition, the NASD Series 7 license is required for people involved in selling securities. Note: Stay away from anyone who drops names. Rule number 1 for private banking is absolute confidentiality. Advisers who have a big mouth may unintentionally give away your investment and tax details and land you both in a tax probe.

TOP 3 tips of hiring a private banker

1. The size of the bank does matter
International investment banks that offer private banking services such as UBS or Citi are, generally, more resourceful, they have bigger research departments, more client service staff and subject matter experts. That makes banks such as Merrill Lynch, Credit Suisse and JP Morgan more attractive than smaller, boutique banks. As a client, a bigger size means you will have access to better proprietary equity research, more secured e-banking system, and certain exclusive investment seminars. If your current financial adviser asks you to move to another firm with him, you may be tempted to do so. Resist the temptation! As a rule of thumb, you move with the adviser only if he's moving to a bigger firm - not a smaller one.

2. Do seek multiple opinions
Many wealth management clients become friends of advisers. The references provided by client advsiers therefore don't actually mean much as neutral or negative feedbacks are automatically left out by the advisers when they try to win your business. You should find out as much about the bank and the advisers themselves as possible, before deciding to do business with them. Keep these questions in mind:

- Does the adviser know about the industry I work in?
- Who exactly will be managing my money, the adviser or his assistants?
- What is the industry reputation of this private bank?
- Is the firm troubled by any compliance or regulatory issues recently?
- What is my level of risk tolerance?
- What type of online banking services does the bank offer? How often do I get statements?
- Does the bank have an in-house trading team?

3. Do specify your investment preference
Some investors trade emerging market products heavily while others only invest locally. It is your right to ask how your account is going to be covered. A good U.S.-based adviser may give you excellent advice on U.S . equities, however he or she may not know that much about the European / APAC stock market. Good private banks have country-specific teams of advisers. If you reside in country A but expect to invest heavily in country B, consider opening an offshore account in country B directly.

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Social skills, sex appeal, private banking, and mega bonus

Nobody wants to do business with someone they don't like, especially when a few million dollars are on the line. Sex sells. That's why most private bankers try to be lookers, even when they are not.

Nobody wants to do business with someone they don't like, especially when a few million dollars are on the line. That's why client advisers and private bankers are systematically trained by their firms to be likable. If you have worked for a private bank before, you will find many of the advisers, especially the ladies, are very appealing and attractive. A private banker must not look cheap. Watches, shoes, briefcases, suits, everything he wears must look mature and classy. Not surprisingly, every guy uses the same thing and kind of looks the same - Rolex yatch master, Armani suits, tanned. You know, they typical GQ look that conveys the image of the successful modern men.

Good looks, good pay. We all get it. Hotness sells. But looks only get you that far. It is, therefore, important to learn what else matters.

I've spoken to several bulge bracket private bankers and they told me about their best and the worst clients. The best, accordingly to them, are rich, middle aged, bored housewives who have too much time on their hands. They are so bored with their shopping that they are the most likely group to come visit their bankers every now and then in the posh office, and spend time chitchatting with their advisers when they should be grilling them for the portfolio performance. It doesn't take a lot of effort to build a good relationship. Advisers, of course, use that relationship to leverage more sales. Little wonder why most private bankers who pocket the biggest bonus are high on the looker scale.

Worst WM clients - according to the private bankers I've spoken to, are self made millionaires. Unfortunately this group constitute about 80% of the client base. Sweet talk doesn't work - not even from a hot, blond female adviser. Hobnobbing is so difficult to do, as these men are super busy and unless they respect you personally, they just don't want you to know anything about their personal lives more than you need to. The only way to impress them is a history of great portfolio performance and sound product knowledge.

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Wealth management in emerging markets

In one country, 1 in 58 people is a millionaire, find out which one.

According to wealth management consultancy Scorpio partnership, there has been a shift of assets managed by top private banks such as CITI and UBS towards the APAC region. In 2007, Asia Pacific's regional weighting was 13%, a sharp increase from 7% in 2006. Cap Gemini and Merrill Lynch counted 320,000 high net worth individuals in China. Consulting firm Mercer Oliver Wyman stated that China has about US$335 billion under management by mutual funds, pensions and insurance companies. The figure was expected to reach $2 trillion by 2015.

Other emerging markets such as the middle east are also seeing impressive growth. The number of high net worth individuals in United Arab Emirates, for example, rose by 15.3% in 2007 to 79,000. Theoretically, 1 in 58 people in the UAE is a millionaire. The higher oil price fuels the economy in the region.

Many private bankers likened China's private banking business to a gold mine. China has achieved an average annual GDP growth rate of 10% for the past 10 years. Until now, there has been very little outlet for all the money that the Chinese has made so far. Their only options are investing in the under-developed, over-regulated stock market, or channel the money into low-interest deposits. There are underground borrowers which pay higher interests, however they are risky for average investors.

Many Chinese investors have not heard of alternative investments such as hedge funds, Forex, derivatives or venture capital. Now the government starts to loosen the regulations, allows more international investment banks to launch operations in China. Those who move quickly will have the first mover advantage.

Key factors that drive the exponential growth of China's wealth management market: (1) Strong domestic economic growth means that more business owners and professionals have the money to invest (2) Deregulation such as QDII allows Chinese people to use banks as an intermediary to invest overseas.

Asian centric banks such as the Bank of East Asia announced its plan to open a private banking center in Guangzhou, capital city of south China's Guangdong province. From the management's point of view, boutique private banks with narrow regional focus are outperforming large, global players in terms of gross profit margin and operational efficiencies. However, as a customer, there are numerous problems of opening an account with a bank is too regionally focused. Certain local Chinese banks, such as ICBC, has significant investment from international investment banks including Goldman Sachs and American Express.

Notable banks that offer private banking services in China include:

RBS/Bank of China (joint venture)
UBS
ICBC (backed by Goldman Sachs as a major investor)
HSBC
Standard Chartered
Citigroup
Bank of East Asia

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Teach me options trading

Options are contracts that give the holders the right to buy or sell a certain number of underlying assets for a predetermined price. With options, you can use a relatively small amount of capital to start trading in the stock market. Unlike futures which can expose you to unlimited losses, option holders can feel secured that their maximum loss is capped. I'll teach you the basics.


Options give you the RIGHT but NOT THE OBLIGATION to buy or sell an asset at the exercise price (strike price), if the market goes against you, you can simply choose not to exercise the options, the maximum loss to holding an option contract is the price you paid for the options itself. You don't suffer any more losses than that.

There are two types of options: CALL and PUT. A CALL gives you the right to buy and PUT gives you the right to sell. When the stock market goes up, as a CALL option holder you may buy stocks at the strike price (lower than the market price) specified in the contract, and immediately sell the stocks in the market to lock in the profit. When the market goes down, as a PUT option holder you can sell your stocks at a fixed, predetermined price. You are therefore protected from a stock market crash.

Exchange traded options are guaranteed against default and are regulated at the federal level. Investors tend to obsess over the choice of options: "Should I buy Citigroup? Or 3M, Microsoft?" However, one's choice of option does not matter as much one's overall asset allocation. Almost any underlying asset can make you money, if you choose the right strike price. The better question you need to ask is how options fit into your overall portfolio. Ideally, your portfolio should include equity for growth, debt and bonds for income streams, and derivatives for hedging. If you need to use a certain amount of money soon, don't invest it all in options. Many mediocre investors don't fully understand the risk profiles of each of the options strategies (Long CALL, Long PUT, Short CALL, Short PUT, and different risk-managed strategies). This group of investors are most likely to expose themselves to massive losses.

Instead of playing along the crowd, successful option traders stand apart. They know how to avoid mistakes such as:

1. Buying contracts that are too closed to expiry
Options have expiration date, investors automatically relinquish the right to exercise the options after the expiration date (i.e. the contracts may expire worthless).

2. Tying up too much cash in options
Options are derivatives, meaning the value of options are dependent on the value of their underlying assets. Unforeseeable events, such as the recent subprime credit crisis or the 9/11 event a few years ago, will create significant market volatility in the options market. If you hold stocks, you can wait for the stock prices to rebound after the market turmoil. Stock options, on the other hand, can expire worthless.

3. Investing in over-the-counter options without fully understanding the risks
OTC (Over the counter) options are not regulated, therefore, there is significant default risk involved. OTC are more customized and they are mainly for big institutional investors.

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Ibankinsider.com exclusive: Inside Private Wealth Management

photographer spotlight: Rad Carper
Where do wealth management clients come from? Why some private bankers can keep their clients while others lose them?


Some established private banks such as UBS tout that their client relationships last for generations, it shows that client relationship management and retention are of mounting importance in the private banking business. Despite the fact that the number of high net worth individuals (HNWIs) has grown over the past decade, it is still not considered an easy task to meet and convert them. Competition between private banks for sizable accounts is fierce as clients are hard to come by.

One interesting topic to explore is: Why wealth management clients move on? Supposedly, private bankers have deep understanding of their client's situation, they provide tailored investment advices that significantly increase the value of their client portfolio. Wealth management professionals also work hard to cultivate personal relationships with their clients, regularly inviting their customers to golfing, wine tasting events and concerts. Some private bankers even went as far as providing concierge services. As a WM client, you can expect an exceptionally level of personal attention.

Although some private banks charge more than the others, most have a pretty similar cost structure of around 1%-2% fees. Cost is not the overall deciding factor of choosing one adviser over another.

Why, then, do wealth management clients want to move on? Common reasons include:

- The client doesn't like the adviser personally
- The quality of advise does not meet expectation (poor portfolio performance)
- Service quality problem (late statement, incorrect online statement, slow response to queries)

The service model of private banking is immensely different from that of retail banking. The minimum account size of US $1 million dictates that wealth management clients are the wealthy and the distinguished. These successful entrepreneurs, real estate developers and dot com millionaires are investors who already know enough about investment to grow their assets to that size.

Private banks and high net worth individuals have a special kind of business relationship, one that is a little bit more symbiotic. Many private bankers can help their clients to sell their businesses, or by working with their IBD colleagues, offer IPO underwriting services for their client's companies. WM clients may have a disproportional share of their portfolio in certain legacy holdings that need to be quickly rebalanced, experienced advisers can help their clients let go of the emotional barriers of selling those holdings and optimized their portfolios. Compare to ordinary financial planners, wealth management professionals have a significantly higher level of technical acumen.

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Bear Stearns fund manager Ralph Cioffi in email trouble

photo credit: CR
Investment banking is a cut throat business, after all. If everything goes right and investors make money, no one is interested to know how the funds actually operate, or how good an investment bank's internal control is. The same can't be said when the market turns sour.
If you were already an investor during the late 90s, you would have seen a lot of "star analysts" from investment banks pushing dotcom stocks they underwrote that eventually became penny stocks.

Investment banking is a cut throat business, after all. If everything goes right and investors make money, no one is interested to know how the funds actually operate, or how good an investment bank's internal control is. The same can't be said when the market turns sour. When trillions of dollars vanished in the Asian financial crisis in 1997 and the dotcom bust in 1999, regulatory authorities, angry investors, financial reporters, bitter unemployed professionals and academics all came out to witch hunt and point fingers, several high profile investment bankers and traders were arrested for fraud or inside trading. After a year or two of low market activity, investors and bankers move on to the next big hype, completely forgetting the lessons learned.

It would come as little surprise that as an aftermath of the subprime mess, Bear Stearn's hedge fund managers Ralph Cioffi and Matthew Tannin were arrested. The SEC accused the duo for systematically downplaying the risks of subprime mortgages in their portfolios in their public statements, and misstating the total exposure to investors. Cioffi and Tannin allegedly told investors that only 6% of their portfolios was linked to subprime mortgages, an internal audit found that the actual figure would amount to around 60%.

There were also allegations that the two had exchanged emails with each other and several other colleagues in which they discussed the dire financial situation the portfolios were in, Cioffi urged them not to discuss the difficulties with others.

Most investment banks have clear, spell out guidelines of email usage. And most people with half a brain would know it is extremely unwise to put down sensitive information in black and white when those information can land you in jail. It may seems counterintuitive why investment bankers, often smart, ambitious graduates from top business schools, would do that. The fact that Cioffi climbed all the way to the top to become Bear Stearns Asset Management's senior managing director to make such a mistake has made it more dumbfounding.

If you have actually worked for an investment bank, you would know why. Email is THE most used communication medium in the bank, followed by chat. It is not uncommon that analysts receive more than 200 emails a day, most are work related while a small percentage are gossips and rants from colleagues. Since ibankers work long hours (10-13 hours), they pretty much eat and live in their little cubicles and have little time to go outside and socialize, a little personal use of the company email is granted a quiet okay by the management. Over time the line has blurred and a false sense of security has developed that email communications are truly confidential. Cioffi and Tannin would have built a much better case if they kept those information to themselves, and it is definitely a lesson for the hedge fund managers and investment bankers who still have a job out there.

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