Injuring private bankers’ wealth

This post is a follow-up to my September post – how private bankers injure your wealth.

I recounted how I was rather horrified/shame-faced to analyse the fees I’ve been paying one of my private banks for far too long. When you considered the double layer of fees due to my ‘fund of funds’, I was paying around 2.05% for a discretionary portfolio.   And the performance didn’t in any way justify this level of fees.

I had some very useful comments about my predicament.  The gist was that I should try to negotiate.  Perhaps I could even offer to introduce some total suckers very daft friends to the service. The commenters included people, like me, who do value the service from a private bank and who empathised with my intention to keep the relationship live – albeit at a lower cost base than before.

So, what happened next?

I confronted my bank with my analysis.  I suspect they were thinking ‘what took him so long?’ because they were ready for me.  And, no, they haven’t fired me yet – unlike the other private bank in my portfolio.

It turns out they are all too happy to stop managing discretionary portfolios manually, and they have an alternative approach. 

Introducing the private bank’s Global Beta funds

Given this post is only relevant to a niche readership (anybody who uses IFAs, wealth managers or private bankers), I’m going to keep it brief.  In essence the new approach boils down to the following:

• Pick your risk tolerance, on a scale of 5. I am apparently a 4.
• My bank then moves all the ‘discretionary’ funds into a Global Beta fund.  This Global Beta fund is, currently, managed by BlackRock.  It comprises about 15 of the obvious asset-geography combination ETFs, e.g. S&P 500, FTSE-100, USA Corporate Bonds, etc.
• The fees then become an all-in 40bps for the Global Beta fund, and about 65bps (weighted average, for my portfolio) to the private banker. This totals about 105bps.

Setting aside that the 15 Blackrock ETFs inside the Global Beta fund would cost less than 20bps if I bought them directly, this fee structure makes a lot more sense for me.  There is a lot less VAT going to the banker, for starters.  And 105bps total is about half of the 205bps I started off at.

I agreed to move 90% of my discretionary fund into this new structure.  This will reduce my actual fees from 205bps to about 95bps, and leave me managing the other 10% myself at a cost of <10bps.

Bankers’ revenge?

The tricky bit then started.  How to move my existing portfolio into the new structure.

My bank essentially suggested selling the whole lot, then waiting for it to settle, then buying the entire new holding at once.  I pushed back – and said I wasn’t happy with this much out-of-the-market risk and wanted to stagger it into thirds.

They then suggested selling, wait for it, a third of all my holdings, waiting a week, and rinsing and repeating.

I asked what tax liability this would have triggered.  The answer was about £50k.  Gulp.  This is many years’ worth of the fee saving I am doing this for.

I then got out Excel and proposed a different way of doing it.

What I did in the end was, firstly, a swap between my discretionary account and my execution-only accounts.

I moved about the highest-unrealised-gain third of the discretionary portfolio directly into one of my execution accounts.  From this point on these holdings are now being managed by me.

I then moved in the other direction, i.e. into the discretionary/high-fee pot from my execution-only accounts, some ETF holdings with low/negative unrealised gains.  This is to keep the size of the discretionary account at about the 90% level I had promised the bankers. The ETFs I sold are identical to the ones in the Global Beta fund, so it makes sense in any case to avoid doubling up more than necessary.

Next, I sold the remaining two thirds of my old discretionary portfolio.  This portion was either at an unrealised loss, or a small gain.  I sold this lot in two halves about a week apart.

Meanwhile, I bought the Global Beta fund in three tranches, each a week apart, in sync with the sales that were funding these purchases.  This has ensured I’ve not been out of the market entirely at all.

Amidst these transactions, the US electorate was sent to the naughty step after voting for The Donald. My bankers at least rang me the day before the election and said ‘do you want to make the second of your major transactions today or shall we leave it a bit?’.  We left it a bit.

How the dust has settled

The consequences of this major reshuffling of my portfolio are fourfold:

1. I’ve saved over £10k per year of fees.  I will have a capital gain tax liability of about £10k too, so in other words it will take me about one tax year to ‘break even’ on this restructure.
2. My asset allocation has lurched US-wards.  The Global Beta’s asset mix is appreciably different to the old private bankers’ portfolio.  The old version had a significant UK bias: over 50% of the portfolio was UK, versus only 6% of Global Beta (in line with global markets).  The new one, as clued by its name, is more global in nature.  So even after other moves in my portfolio, I am now overweight versus my target allocation by about 10% in the US, and underweight by the even more in the UK.   This isn’t a major problem for me but it means I will be buying only in the UK for a little while yet. I may reduce my target UK weighting from 35% to 30% or even lower but that feels a bit like the cart pulling the horse.
3. My income has dropped.  By about £10k, doh.  The average yield of the Global Beta fund is about 2%, whereas the yield of my old discretionary portfolio was over 3%.  Overall I expect total returns to improve, and the lower income will reduce my annual tax liability too, so while it will be a bit disconcerting I see this as a positive.
4. I have ‘inherited’ a rather ragbag portfolio which I’m now managing myself.  These are the holdings in the discretionary portfolio which have unrealised gains too significant for me to crystallise easily.  Most of these are FTSE-100 stocks that have risen a fair clip, such as Unilever, Rio Tinto, and the John Wood Group.

If you’re a regular reader of this blog, you’ll already know that I’m going to monitor the impact of this major restructuring closely in the months to come.