Lessons we can collectively learn

When the dust eventually settles over the La Valette Multi Manager Property Fund issue, the investment landscape will hopefully look very different, from many perspectives. The players in this industry, namely the MFSA, the product providers, the wealth managers and the investors themselves should all stand back and take a long hard look to see what lessons we can collectively learn. There are many.

Wealth managers have an important role to play and we need to display a greater degree of professionalism and transparency. The industry has come a long way since our humble beginnings and the approach to clients must reflect this. Knowing one’s client and being able to fully understand a client’s attitude to risk is absolutely critical. Unfortunately, our industry does not appear to be built on this fundamental concept.

Instead our motivation is geared to building commission income streams that are by their very nature dependent on selling investments or products to a client. Having sales targets or commission-based incentives are dangerous tools that, in the wrong hands, can lead to the wrong investments being sold to clients. This is not the way forward.

A more wholesome approach is required, whereby wealth managers are more skewed towards charging fee income to their clients rather than commission income. This will remove the distraction of trying to sell products to generate income. It will also help the industry invest in portfolio managers, not salesmen. This is an important distinction.

Having a portfolio manager that looks after your investment portfolio without an incentive to raise commission income allows the portfolio manager to focus more on the long term performance of the portfolio. It allows him to focus on capital preservation, on capital gains and or income – not on what his bonus will be at the end of the month/quarter. Industry trends internationally are moving ever closer to this model, albeit slowly. We are a small industry in the early stages, trying to compete internationally. We can and should move quicker to this model.

To be able to do this there are key factors that need to be recognised and changed. Clients need to understand the importance of using service providers in a way that ensures these service providers are giving an independent approach to their portfolios. For example what use is it in having the same institution act as a trust manager and an investment manager at the same time?

Can the trust manager objectively challenge his own colleague should the investment performance not be up to scratch? Can he sack the investment manager if the underperformance persists? This is what a trustee should be offering to his client. This is what clients should be demanding. It may be a little more expensive in the short term but it is a lot more effective in the longer term. The regulator also has an important role to play. Retail investors need more protection from ‘financial planners’ who push products onto them. Investment products and strategies are getting more complex. Incentives to sell are getting bigger and more attractive. It is all well and good having a prospectus that reads like the New Testament, without the inspiration, or having a larger number of risk warnings, if nobody really takes notice of them.

The control is needed at the level of the portfolio manager, at the product development level and in the way the investments are sold to the public.

For example, I know of no developed country where initial public offerings only take place by way of retail offerings. In this respect it should come as no surprise that retail investors believe that if the MFSA authorised an investment for sale to the public then there is a mistaken belief that the MFSA has given its seal of approval. We reap what we sow.

Clients on the other hand need to better understand the relationship between risk and reward. There is absolutely no such thing as a free lunch – unless of course you work in some government institution. Then there are freebies galore.

Think of it simplistically. If Malta Government stocks yield approximately four per cent then anything giving a higher return contains more risk – and therefore contains a higher probability that there will be a loss of capital. The approach from clients needs to be a more wholesome one. If knowing your client is key from an advisor’s perspective then clients too need to understand the importance of selecting, not a service provider who is going to sell you products but one who is interested in the long term nature of your investments.

We have an opportunity to make progress on the back of the La Valette Multi Manager Property Fund.

Sadly there are other skeletons in the cupboard but there is still a chance to move forward and learn from any mistakes that we may have made. Let’s not lose this opportunity.

Curmi & Partners Ltd are members of the Malta Stock Exchange and licensed by the MFSA to conduct investment services business. This article is the objective and independent opinion of the author. The information contained in the article is based on public information. Any opinions that may be expressed here above should not be interpreted as investment advice, nor should they be considered as an offer to sell or buy an investment. The company and/or the author may hold positions in any securities that might have been mentioned in this report. The value of investments may fall as well as rise and past performance is no guarantee of future performance.

www.curmiandpartners.com

Mr Curmi is managing director of Curmi and Partners Ltd.