Private banks shun no-fee funds

The credit crunch is driving the growth of Exchange Traded Funds (ETFs) according to iShares, Barclays Global Investors (BGI)’s ETF platform, which has gathered E11bn in Europe year to date, twice as much as the E5.8bn of 2007. According to the latest study from Deborah Fuhr, global head of ETF research at BGI, in Europe the net sales of ETFs in the first seven months of the year totalled $43.6bn (E34bn), while net redemptions of European domiciled mutual funds swelled to $148.6bn, based on data from Lipper/Feri. Because of the market turmoil, investors would be looking to reduce the level of risk in their portfolios by taking long term index exposure using ETFs. Concerns about the issue of counterparty risk and the rising cost of derivative products are driving investors to favour ETFs, which offer transparency and flexibility, over less transparent products said Andrea Morresi, head of sales for iShares in Europe. Investors are perhaps interested in ETFs, said Manuela D'Onofrio, head of global investments at Unicredit Private Banking, because the unprecedented increase in volatility, in both the market indices and the spreads between equity sectors and individual stocks, has driven the tracking error of active funds to rise. And by buying ETFs, investors avoid being exposed to the risk that the manager may underperform the benchmark (alpha) and are only exposed to the market risk (beta). However, it is a different story whether the market turmoil is having any impact on the decision of private banks to offer ETFs. These instruments offer low profit margins - there are no front end commissions for ETFs - which proves to be an obstacle for their full take-up in the private banking world. “We don’t offer ETFs to our clients, because there is scarce demand,” said a senior investment manager of a large European private bank. “Our clients don’t tend to have a great financial knowledge and they don’t know the ETF product that well. “Moreover we are not proactive in offering these products,” added the manager, “because when a private bank sells an ETF earns as much from it as from the sale of a Treasury Bill. From a commercial point of view there is no advantage in selling ETFs.” The problem revolves around the fact that advice to private investors is given for free. ETFs will become interesting when private banks will finally move towards a system which remunerates advice to clients. Only then, will banks take into account the whole range of tools available, regardless of potential retrocessions, added the manager. “We experience little interest for ETFs given the broad range of funds we have,” reiterated Patrick Wierinckx, business development manager at KBC Private Banking. ETFs were employed for the Belgian private bank’s clients only to gain exposure to niche areas such as gold, soft and hard commodities or to individual markets, such as Hong Kong, Taiwan, Vietnam or sub sectors like semi-conductors, for which there were no other instruments or funds available, he explained. But, as with equities, the interest in ETFs has decreased since the start of the crisis, simply because the appeal for these underlyings has vanished. “At the beginning of the year, gold was a hot topic, everybody wanted to buy gold, and if you don’t have a fund investing in gold, then you gain exposure to it for your clients through an ETF. But now there is less interest for gold and the same applies to commodities or the Asian markets,” said Mr Wierinckx.

Revitalising wealth management business models PWM readers are invited to attend the FT 2008 Private Banking Summit, which will address the key issue of revitalising wealth management business models against the background of the continuing financial crisis. Juerg Zeltner, a board member and head of wealth management at the UBS Group will make the keynote address looking at when traditional Swiss banking models require wholesale change. One of the important questions he will tackle is whether private banking should sit with investment banking and asset management, alongside with the challenges to open architecture posed by an integrated model. Panels assessing both structural issues and potential sources of growth from private banks will include contributions from Julius Baer’s chief operating officer Boris Collardi, Syz Bank founder Eric Syz and Bank Sarasin’s managing partner, Eric Sarasin. Alpha generation models will be the focus of a speech from Zeno Staub, head of asset management at the Vontobel private banking group. Senior representatives from Credit Suisse, Dresdner Bank, Citigroup, Fidelity, Bank Medici and Diapason will also be taking part, and their will be strategic contributions from consultants Millenium Associates and Scorpio Partnership. The conference, to be held on 26th November at the Mandarin Oriental Hotel du Rhone in Geneva, Switzerland, will be sponsored by Barclays Capital, the Qatar Financial Centre Authority and Collins Stewart Fund Management. There are still complimentary tickets available to private and retail bankers, fund and product selectors and discretionary wealth managers. Register online at www.ftglobalevents.com/bankinggeneva08, email finance.event@ft.com or call +44 (0) 20 7775 6653.