Transparency, Transparency, Transparency in portfolio performance

Four years ago, I started preaching about Transparency in wealth management. In the Global Transparency movement in Portfolio Performance from the Daily Fintech archives in October 2015, I asked for

`…  a world in which Barron’s top advisor annual rankings take into account performance. Believe it or not, right now these rankings don’t include performance (it is stated in the fine print) and are probably heavily influenced by AUM.`

The largest and most mature Western wealthTech market – the US – is nowhere close to a kind of Transparency that takes into account ACTUAL risk-adjusted PERFORMANCE. The market focus remains on size, measured by Assets under Management (AUM), and low-cost products, as the zero-commissions war has looted North America. Standalone Fintechs, like Betterment, Wealthfront, and Personal Capital add metrics like Numbers of clients or monthly active users (MAU). Robinhood, the `father of zero-commissions` sells order flow behind the scenes ( What has triggered the explosion of payments for order flow? Not Fidelity from our 10/2019 archives). Nobody publishes actual risk-adjusted performance. Some providers publish model portfolio performance.

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer – No.3 influencer in the finance sector by Refinitiv Global Social Media 2019.

What caught my attention recently, was a monumental move out of Switzerland in the Global Transparency movement in portfolio performance. A free mobile app, the Performance Watcher, enabling clients of two Swiss banks to monitor on a daily basis, actual risk-adjusted performance in comparison to identical risk portfolios. No model portfolios. Full transparency of performance.

Switzerland has long been a wealth management hub for several reasons. Nobody can claim these days that one of the reasons is reporting opaqueness and lack of reporting transparency for international clients.

AUM

As of the end of 2018, CHF 6.9 tn of assets were managed in Switzerland (4.8% less than 2017). This includes both private and institutional assets, domestic and international. According to the Swiss Banking Aug 2019 report, the break down is: CHF 1.4 tn of domestic private assets, CHF 2.3 tn of private assets in cross-border customer relationships, and CHF 3.3 tn of assets originating from companies and institutional clients.

Margins

Switzerland has not escaped of course the downward trend in the wealth management margins. From 2013 to 2018, margins have decreased by 12 basis points, from 90 to 78 basis points, for the entire business. The reduction is more significant in the case of the cross-border businesses. Figures are from the Swiss Banking Aug 2019 report.

Performance

The market looks at the performance of wealth managers, as a business that offers a variety of financial products and services. Business performance is quantified by stock prices in the case of publicly traded entities.

Nobody talks about client performance as a service. This confirms the disconnect between the quality of service and price, which persists unfortunately in financial services.

In a customer-centric world, wealth managers should provide their clients with a transparent and easy way to compare (on a risk-adjusted way) performance. The industry has avoided this, claiming that such a comparison is difficult. Benchmarking portfolios to MSCI indices or other Equity indices, is a disservice to clients and is so 20th century.

Performance Watcher, is the solution to this. It has been developed by IBO, Investments by Objective. A simple data normalization algorithm that makes it easy and visual to do comparisons through a Performance Score and a Risk Score. The data needed for the algorithm is the anonymous daily total asset value of the accounts and the total in and outflows. The data is secure and completely anonymous. IBO only stores statistical data and does not manage any money.

Several Swiss banks have been using the service over the past 2 yrs. The number of institutions joining has been growing and IBO has been integrated into the Avaloq ecosystem. Currently, CHF 40billion are being processed from 15,000 accounts. Nicholas Hochstadter, CEO and Founder of IBO, makes the analogy of purchasing decisions through Comparis or TripAdvisor.

Customers don’t really know about it because it has been used only internally, up until recently. Either to compare different strategies or to improve the choice of financial products deployed for a certain investment theme.

Banque Cantonale des Grisons and Banque Gonet are the first two Swiss banks that are offering to their clients the comparison service.

Each client, in their own privacy, can monitor on a daily basis in a simple visual way whether they are compensated for the risk taken.

Example for the Anonymous account-client PF8742. Left is the 2019 ytd performance and right is the 2018 annual performance.

Performance Watcher Indices, calculated for 2019 ytd from the 15k portfolios

Screen Shot 2019-11-25 at 09.23.15

We need to see more wealth managers joining and offering clients full performance transparency. Social trading platforms with copy trading, have taken this approach from the start. Traditional wealth managers are late but more surprisingly, Robo-advisors have not been eager to offer this kind of daily, visual, standardized benchmarking.

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