One would have thought that, given the damage to the trust that investors have in the investment profession, financial companies would work harder than before to bring good products to their clients. During the financial crisis of 2008, many investors suddenly found that the recommendations made by their advisors were more for the benefits of the advisors and their employers than for the clients. Now, clients are casting a more skeptical eyes on proposals made by their advisors. Given this situation, I was surprised  learn about a sales pitch made by a large asset management company to a friend of mine recently.

My friend, an elderly lady, is a long time client of the private wealth management division of the asset management firm, which was one of the big five investment banks in the world, and now one of the three surviving big financial firms. My friend has a portfolio of about $2 million, so she is not a big client by their standard. Recently, they recommended that she sold some equity funds in her portfolio, and switch to a fund run by their own company. The fund is to be established in November this year, so it has no track record. It is basically a balanced fund, with a long term target of 40 percent in global equity, 40 percent in fixed income, and 20 percent in alternative investments. There was no upfront fee, and the annual management fee of 1.3% seems reasonable.

However, compared with other similar funds, this fund is not very liquid. It is only priced once a month, and after the shares have been sold, 90% of the fund would take two months to reach the client, while the remaining 10 percent would only be released at the end of the annual audit of the fund, after adjusting for final price confirmation of the fund shares.

When my friend raised this concern to the bank's staff, their reply was that the alternative investment segment of the fund would add good value to the fund, and thus, by implication, the inconvenience in terms of liquidity should be an acceptable trade-off. They repeatedly emphasized that the fund used to have a much higher minimum investment requirement, and hence was a privilege to only a few very wealthy people. I do not know how effective that line of marketing is on a large number of investors, but it did not work with my friend.

The fact that my friend bothered to go to a hotel lobby cafe to meet with a sales person from the bank in addition to answering many calls from the bank regarding this product that they were marketing shows that she had some interest in a new financial product, and was waiting to be convinced. However, she was introduced to a product that had little appeal. There was scant information on why this product would justify the cost of my friend selling existing holdings in order to buy this new one.

While my friend was interested at one point when the salesman suggested that the new fund could serve as a core component of her total portfolio and the rest of her small short term investments could continue to work as satellites to enhance performance by taking on higher risks, the salesman did not continue to demonstrate that he had a good understanding of my friend's investment habbits. For example, if he had been able to demonstrate that, had my friend invested in this fund five years ago, it would have saved her money in terms of the cost of transacting in and out of several funds (which she did during the last five years), as well as offered her better protection during the recent down turn, she might have viewed the new product more favorably.

The point that I am making here is that, while clients were willing to accept investment proposals offered by reputable financial institutions based on faith in the past, this is no longer the case today. The clients are likely to be more critical in examining the merits and drawbacks of a proposal, and be concerned that they have not been told about the downsides of the investment product being marketed. In the case of my friend, she was annoyed that she had to read about the 10% hold down amount by herself when she looked at the contract later, and was not told about it during her many conversations with the sales people. Nowadays, only those financial professionals who can show their clients that they care more about the clients than the short term interest of themselves can they gain the trust of their clients.

(- Chiu-ying Wong, CFA, 21 September 2009)