“. . . a spreadsheet is no way to measure a man.”

-Scott Pelley, interviewing Paul Tudor Jones founder of Robin Hood Foundation

From Tanzania to Wall Street

After several years of working in the hedge fund industry as a marking and investor relations professional, Stacey Asher (pictured left) embarked on a journey Tanzania to climb Mt. Kilimanjaro and volunteer with Light In Africa at an orphanage.

At the orphanage, she taught Math and English classes, helped to organize medical dispensaries in remote villages, and worked at a food kitchen; this kitchen fed 250 children, 5 days a week. On her last day in the country, she had a conversation with a cook who told her, the previous year the kitchen had been shut down due to lack of funding. As many children in the village relied on this kitchen for the majority of their weekly nutrition, several children died of starvation.

As anyone would, Stacey asked, “how much does it cost to run this kitchen?” The answer: $250 a month. A life changing moment.

After spending so much time in this village, how could she just fly away and forget them? Immediately, on the flight home, Stacey began compiling a list of family and friends she believe would work with her to keep the children fed. Looking over this list—she wondered what causes touched her friends as much as Light in Africa did her.

Over subsequent weeks a few statistics validated a thought she jotted down in a notebook.

The first was that in 2011, 30 million people played fantasy football. The second, there are more than 70 million retail and professional investors in the United States alone. What would happen if we emulated fantasy football, but with stocks instead of players, and directed the proceeds to the winners’ charities of choice? From a small orphanage in Tanzania, the idea for Portfolios with Purpose was born!

After proposing the idea to mega-investor Joel Greenblatt, he agreed to back the startup non-profit organization.

How it Works

The concept is simple. Pay an entry-fee based on your level of investing experience--your class. Pick five stocks, long or short, and play the fantasy portfolio over the course of a year. All player entry-fees are collected in an escrow account and the top three player portfolios’ charities are given 100% of the funds! Portfolios with Purpose is privately funded, so the only fee taken from donations is credit card processor costs, the rest goes to the cause.

Registration

The competition starts on the first trading day of 2014, which means registration to play will close on December 31st, 2013. It’s only $100 to play as a novice, and $1000 if you want to run with the Professionals. 

Who’s Playing?

David Einhorn, Leon Cooperman, Joel Greenblatt, James Dinan, and many more Master Investors are playing for their favorite causes—at Portfolios with Purpose, we’re Invested in Giving.

Visit www.PortfoliosWithPurpose.org before December 31st to register! Good luck in the competition! 

Oopsy-daisy did I make a little boo-boo? Last time I wrote about assets under management and custody fees. I omitted to mention one important point that can be easily misunderstood (and based on a few emails and tweets I received was).

It’s bankingspeak hence it can be misinterpreted by those who are not inside the biz. As it is this blog’s job to lift the curtain on all the nasty private banking jargon, I thought it appropriate to delve a bit more in to the assets under management (AUM) thingy.

It is this:

Assets under management are not necessarily managed. I mean to say, all assets that are managed are assets under management but not all assets under management are managed. Clear? No? Oh do pay attention please.

Okay, I’ll try again.

It’s the word “management” that gets people. Think of it like this: The term assets under management simply refers to how much moolah-money-spondulicks and other assorted assets are in custody with the bank. Those are assets under management. It has nothing to do with who manages the money (makes the investment decisions). It is simply a top dog, alpha male contest between banking CEOs to see who has the biggest swinging AUM.

So now we come to the management side of the money. Who manages the money? This is a decision the client needs to make when they open an account with a private bank. 

When we digest the whole private banking proposition to its legal core, the client has two choices.

Consultative

This means the client is the one who legally makes the final decision on the investments. Their banker will wine ‘em, dine ‘em and advise ‘em. But it is the client who makes the decision to pull the trigger to buy stocks in that rubber farm in Las Vegas that is listed on the Nairobi stock exchange.

Discretionary 

This is what people often confuse the term assets under management with. A discretionary mandate is when the client outsources the investment decision making process to the bank and a team of super whizzes straight out of university will play wonders with their excel charts and move money about from here to there and there to here. In effect they manage the money. The client simply sits back while their banker wines’ em dines ‘em and notifies ‘em. 

The banker’s job is simply to tell the client what is happening in the portfolio and why things are being done the way they are.

Does the clear it up?

I hope that clears it up. It's an important distinction, because when we boil it down, the big question each and every time, particularly if there is a dispute, is who  is responsible for the final decision of making the investment.

In the upcoming weeks, I will do a whole series on how private banks make money. I will break down for you what you can expect from a private bank’s price list, and you can learn how to read it, so that you can compare it with competitors. You can learn how to spot if your potential or current private banker is charging you too much and taking what I believe Cockneys refer to as diabolical liberties.

How did I come up with this idea? Well, it twas all twanks to a tweet I tweeted twast tweek. This is what I tweeted:

“IB” stands for investment banking. One of those little cartoon light bulbs lit up above my head. Of course! Why have I been so blind and stupid? Outside of finance, most people think if it has the word “banking” at the end of it, then what comes before is irrelevant, as they’re all a bunch of sociopath banksters anyway—hang ’em high and let’s have a party!

All offer the promise of fulfilling your financial fantasies: Investment banking, retail banking, corporate banking, and private banking. Yeah, baby, yeah! Me love you long time.

In actual fact, they're same same but different, where the clue tends to be in the first word.

This misconception of all banking somehow being the same is completely understandable, hence my little flashing light bulb. It was a reminder to me how differently those inside the business view the world from those outside the business.

So, now I’m going to do what I should’ve done at the beginning of the blog. Take you into the nitty gritty of private banking: how we private bankers make money.

No one on this planet is as good at layering fee upon fee upon fee as us private bankers, and then spinning it around to make it as confusing as possible for the client. 

Imagine walking into a café one morning and ordering toast with butter, but instead they bring you a full English breakfast. It has toast, doesn’t it? So, you got what you ordered plus extras—plus a larger bill.

That full English breakfast is your private bank. Some of it is nice (like the bacon as everybody loves bacon) and some is not so nice (like those nasty English sausages as no one but the English likes English sausages), but one thing that we can all agree on is that a full English breakfast is a lot of stuff!

So without further ado, let's get started, and we'll start with the most important one.


Assets Under Management

This is the main driver for private banking revenue, also referred to as AUM (for rather obvious reasons). This is what makes private banking such a coveted business. If you attain enough of this stuff, you can just sit about on your backside with your feet up on the desk, shut off your Reuters and/or Bloomberg and surf the web for pictures of bikini-clad lovelies or Puerto Rican pool boys, depending on what takes your fancy.

You can do this until it’s lunch time when your second hardest task of the day begins, navigating the wine list. The hardest task of the day is to stay awake at your desk in the afternoon.

Now you know the secret why private banking executives are so keen on “inflow” and increasing AUM. More inflow = more wineflow.

On a private bank's price list, it will most likely be called a "custody fee" or if they are feeling particularly lavish, "safe custody fee."

This is how AUM works: you place a portfolio of stocks, bonds, and cash in a private bank, and they will charge you custody fees based on those assets. Basically, you pay for the privilege of keeping your money in their bank. The fee is normally a percentage, possibly with a fixed minimum (to keep out the poor people).

The amount of custody fees depends on the underlying asset. The custody of bonds tends to be cheaper than the custody of equities. Custody fees vary greatly between banks, and they are described in the price list differently depending on the bank. A bank can charge monthly, quarterly, semi-annually, or annually. This, of course, makes it a little harder for the average client to compare prices between banks.

Unlike in certain other things (as we men are so often told) size really does matter in private banking. The bigger your wallet, the bigger the reduction in fees you can haggle for yourself. It’s, therefore, very difficult to give an exact percentage as to what you should be paying.

But you want a percentage figure from me, don’t you?

Okay, okay. As a rule of thumb aim to be paying closer to 0.5% than 1% per annum for custody fees.

Today's guest blog post by Francesco Maggioni is on the current state of the global economy. I'm a fan of Francesco's "Big Picture" articles and also his approach to asset allocation. 

Francesco has a wealth of experience from the financial sector, he has worked for HSBC Private Bank and Credit Suisse Asset Management amongst other. 

This article is an updated version of one of his previous articles. I recommend you follow Francesco's website francescomaggioni.com. Francesco is also active on Twitter with the handle @fmaggioni. 

Take it away Francesco. (If you prefer to download a pdf version of the article you can find it by scrolling down to the end)

The above “heat map” (seldom has this term had a more appropriate meaning) is provided by the Economist website and shows the latest level of debt country by country as of December 2013.

It is no surprise that the Western world is the sick patient here with more or less developed countries being just behind them. Africa for once, is the best in class with almost no debt.

The reason why I am preparing this study is to try to analyze the situation and come up with some possible forecasts for the future of equities and government bonds from now on.

Next to the map there are pieces of data concerning three countries: Italy, the United States and Germany.

Unfortunately those data, to me, are not correct (or at least it will be beneficial to know how they are computed) since they seems to imply a few things:

-       Public debt: this number is a well kept secret. Nobody really knows what is the debt level for the US or Germany. For sure the former has unfunded liabilities which are not taken into account (someone say its debt is in the 100 tril. USD range) and the latter’s displays only the debt at central government level, not taking into account the regional level (Laender) which if summed up, reaches Italy’s level. Italy is very much in the same situation, but there does seem to be a bias to make Italy look worse in comparison to Germany. Unlike in Germany's case I would guess accountants and journalists have added everything in to the mix when it comes to Italy now and for the future (Please note, I am not pro-Italy here).

-       Debt per person: even though it is a correct result of the division between debt and population, this data implies that each citizen is able to pay the debt. It doesn’t take into account the level of unemployment, which if it would be accounted, it would make the debt per person much higher due to a less (working) population and the increased level of debt. And even if it takes into account the unemployment level, it is still non-complete information. For instance, in the media the unemployment rate in the US is always trumpeted without mentioning the participation rate, which is the percentage of active people who are looking for jobs on the total population. The current participation rate is at 63%, at 1970s level.

But for the moment lets us take these figures as correct (the veracity of the figures is not my main point in the article).

In the last few months we are witnessing a widespread timid increase in interest rates. Why is this happening? One reason is that since the US economy and in general the Western economies are showing timid signs of recovery. Money is shifting from safer assets into riskier assets, namely stocks. Another reason is that because of signs of recovery, investors are predicting an increase of GDP which means higher spending for individuals in consumer discretionary goods or simply a higher turnaround of goods. That has the effect of an increase in revenues for companies, and that is the bottom line for switching from bonds to equities.

But is it really so? Even data on consumption is difficult to interpret making it almost impossible to really understand the current situation.

However what could bring more clarity to the situation is the Consumer Confidence Index which is at a very low level compared to previous recoveries.

2000 – 2013: Investing in the era of chaos

Looking simply at a buy and hold strategy for the last 13 years the highest returns would have come from bonds, while the equities would still be negative (in the Western world only the US and Germany would have given a fractional positive return). The average return from bonds is around 3-4%.

This chart can give an idea of what I am referring to:

For a number of reasons, the evidence is that interest rates are rising despite the effort of any Central Bank to stop it and keep interest rates at historical low for a prolonged historical period of time.

The Quantitative Easing in the US, Switzerland, Japan and the United Kingdom which were in part responsible for this low interest rate environment has also had another consequence; driving stock markets to historical highs.

Do you realize how many times the word historical is used above in the space of only five lines?

These are not emphasis added, these are facts. At some point markets will leave this stretched situation of multi historical levels, it cannot last forever.

QEs and rates cuts forced investors to put their money in the only space left with positive nominal and real yield, the stock market. That is true for the average Joe as for the Chief Investment Officers of pension funds alike who are managing pension money within their mandate, probably overweighting (correctly) equities and underweighting bonds.

Let’s look at smart money then, big institutions like Pension Funds of Sovreign Wealth Funds.

With US Treasuries arriving at a 3% yield what will they do with their allocation? They will probably start moving part of their equity (riskier) allocation back to where it should have been in normal conditions namely in the bond space causing redemptions from US equity funds to bond funds.

Not surprisngly in the last few weeks US equity funds had a massive outflows of 22 billion dollars (source: Market Movers on Bloomberg TV).

The same is happening and will happen in Europe, but in a slightly different fashion.

Currently the 10yr German Treasury, the “Bund” has a yield of 1.74% (down from 1.99%), with the Italian counterpart BTP at 4.10% (down from 4.55%); you can see a table at the of the report with a complete list of yields.

If the rise in interest rate will materialize in Europe too, what will happen?

Well the yield chasing made investors in the recent past buy every sort of lower grade bond, from Italy to Spain, Portugal alike. This year is also a historical year for junk bonds emissions, no wonder.

But when the Bund will go back to a quasi average yield of 3%, what should be the yield level of peripheral Europe to lure investors to stay with them? Even if the spread between the German Bund and the Italian BTP stays at current level (237 bpts) it would mean a higher interest expense at 5.30% which is too close to the 6-7% level that is the default area.

If that scenario will unfold, it will become a potential self fulfilling prophecy of higher interest rates in peripheral Europe, and still a considerable low interest rate enviroment for the Northern Europe countries, but why is that?

For the same reason of the US instituational investors effect moving from equity to bonds.

Institutional investors in Europe too (or generally institutional investors who invest in Europe) will move their allocation from overweighting peripheral Europe to underweighting it, and increase allocation to safer assets at a decent return, namely German Bunds.

Today the higher cost of funding for Italy in comparison to Germany is around 20 billion Euros per year, which can only go up if interest rates move upwards.

Let’s assume that the rising interest rate enviroment is correctly forecasted because a true recovery is materializing (which is not the case by the way). Governments will see their cost of funding increase but at the same time their receipts from taxes will also increase. The net effect remains to be seen and hope that the taxes are higher than the increased cost of funding.

But what if something goes wrong, and tax receipts do not increase? In Italy they know exactly what will happen, a spiral effect where at the same time lower tax receipts come with higher cost of funding, jeopardizing every effort that the government and the citizens have made so far.

Italy is not alone with this problem, in fact all Western countries face the same fate if interest rates start to go up, United States, Japan, France, Spain, Portugal all these countries will have to refinance their debt at a higher price and in order to be left alone (from IMF intervention for example, they will have to continue with the austerity measures or increase taxes: what they will not be able to afford is reducing taxes at the very best).

That is why personally I am very skeptical on greeting the arrival of a new rates rising environment, it will have a mixed effect, and we do not know how good or bad that net effect will be.

This historical (!) moment is one of the most complicated time for forecasting markets and their directions because too many variables are there, not even considering external potential factors or geopoitical events.

I often like to quote Donald Rumsfeld, the former Secretary of Defense in the Geroge W. Bush administation when he said:

“There are known knowns; there are things we know that we know.

There are known unknowns; that is to say, there are things that we now know we don't know. But there are also unknown unknowns – there are things we do not know we don't know.”

Which for our purpose can be read this way:

“There are known knowns; there are things we know that we know.
Economic and financial theories.

There are known unknowns; that is to say, there are things that we now know we don't know.
Directions of equity and bond markets in the near future.

But there are also unknown unknowns – there are things we do not know we don't know.”
Events that will interfere with theories and forecasts that could not possibly be foreseen.

Watch the above video and I’ll come back to it later why it is relevant to this article.

I’ve already managed to offend UBS and JPMorgan so let’s make it a hat trick shall we? I will now say toodle-oo to any hope of a Goldman Sachs career by writing about Goldman Sachs’s social media strategy. 

Actually, I’m going to say really nice things about Goldman Sachs. They are extremely active on social media and have a very clear strategy of how to implement their well defined plan… Only kidding. They’re actually really rather useless. But we should at least give them an apple for  trying.

Okay, so let’s get started, what’s this all about? 

I began taking an interest in Goldman Sachs’s social media strategy, particularly their Twitter strategy, when I started to see regular promoted tweets from them on my Twitter feed. 

I tweeted a request to my followers to email me screenshots of any Goldman Sachs promoted tweets they received. Here’s just a few of them (thanks to all who took the trouble to send me the screenshots)

As you can see from the above visuals Goldman wants to show us all that they are nice, warm, cuddly and fuzzy and wouldn’t we all just like to nuzzle up in Blankfein’s beard. Group hug all.

Fair enough, every corporation has the right (nay obligation) to make itself appear as a good egg. So what’s the problem with Goldman’s strategy? Well it's all a bit like British sausages isn't it? Rather bland and not very good. Allow me to elaborate.

“We’ve learned that we have to invest in telling our story online and protecting the Goldman Sachs brand.” Said Lisa Shallett, Goldman’s head of digital world domination and social wizadry.

Lisa may think she’s telling a story, but she’s not. The again, us banking people aren’t really known for being story tellers of the riveting variety. In fact, what Goldman is doing is conducting a good old fashioned direct marketing campaign. All they are doing is giving you an advertising brochure and delivering it through social media.

So how’s that working out for them?

Not particularly well. Goldman has over 100 000 Twitter followers (I’ll get to those in a bit) and each of these brochure tweets get’s just a few retweets. Go have a look, now. It really isn’t going well for them. Let me put it in even clearer terms: No one is listening to Goldman Sachs!

Then we come to the followers. Here’s a chart of the growth of Goldman's Twitter following.

Within three months the Twitter following of Goldman Sachs has gone from 66 000 to 106 000. That’s an addition of 40 000. Now if you look at the statistics below, they indicate that a total of 66% are either fake followers or inactive. That's 70 000 of their followers! (Note that fake follower metrics are not accurate, they are indicative)

You don’t need to be doing a Goldman Sachs internship to work out that this looks a little suspect.

It appears that Goldman (or whoever they’ve possibly outsourced the grunt work of their social media to) is buying followers. It's possible that somewhere in Mumbai there's a fellow with an MBA and a degree in engineering, earning $0.95 an hour, tapping his fingers to the bone pumping out Twitter profile after Twitter profile just to make Goldman appear popular. 

(Having said that, this is a common practice and I've written about it before. Click here for my article about buying a following.)

So what is it they need to do? 

Well that's simple: They need to engage with their audience.

I've written about this until my fingers bled and talked about this until my throat has turned to sandpaper, but when oh when will financial companies get it that social media is about being social? Come on people, get with the program, the clue is in the name dammit. It starts with the word “social”. You need to engage and you need to discuss. How you engage and how you discuss that is the strategy. Sending out advertising brochure’s and keeping your mouth shut isn’t a strategy. It's just being lazy. 

Goldman needs to get some live bodies in there, some of Goldman's own pretty boys and pretty girls, all smiling and grinning and drunk on the corporate Kool-Aid. Obviously you keep them on a short leash, but that’s what things like Hootsuite and Tweetdeck are for. You start engaging with those people on Twitter who aren’t trolling Goldman. Amongst the fake followers and the rest, surely there must be at least two who will behave nicely to Goldman. 

Guess what happens then? You start building a fan base of people that retweet and promote your content (yes the brochures too) and discuss with you in a civilised manner. That means that all the trolling and negative stuff gets pushed down the feed so it is out of sight when people search for “Goldman Sachs”.

I can’t believe I’m this dumb, I’ve just written lord knows how many billable hours worth of advice to Goldman Sachs on how to make themselves look loveable on Twitter. I think I’m going to go off now and shoot myself. Oh wait!!! 

The boxing video at the beginning. Did you watch it? What was my point? It’s a video of a street fighter who had had the great idea to go into a boxing gym and challenge a boxer. So the coach of the club put a fifteen year old boy in the ring with this “tough guy”, a grown man, who then took a right proper bashing from the young lad (as you can see from the video).

Social media is like boxing. If you want to become good, you need to watch lots of it and read about the different types of training regimes, but none of that is any good if you are not actually doing the training and most importantly, getting in the ring regularly to do the hard physical sparring. It’s painful, it’s hard work, you get an ass whoopin' every now and then, but you learn to operate and do things correctly under pressure and you eventually come out on top.

Not having the necessary skills and experience can work for you for a little while (like for the street fighter in that video, he did okay to begin with) but in the end experience and skill wins out every time. Don't believe me? Just #AskJPM

What are the issues with banks today?

The major problem with banking today is the lack of transparency. No matter how many regulations are implemented it does not change the fact that depositors, investors and shareholders have no idea what happens with the money. A retail banking licence effectively means that banks own depositors money, can spend that money as they wish and have the ability to create money through the issuance of credit. Bank loans tend to go to either the least risky or most profitable. It is why approximately 80% of the major UK banks loan book go to either property loans (As they are backed by assets) or financial speculations (As it is the most profitable). Last in line is a business, but businesses create most of the UK's jobs and contribute to the non-inflationary productive part of our economy. 

What’s the background to bank to the future?

BankToTheFuture was founded to let people invest in private companies starting from as little as £10 and have more say over what happens to their savings and investments. At the moment we focus on the equity markets and it is like an online dragons den, democratising investing so anybody can be a dragon and invest in companies that they like. We wish to expand and offer debt products and secure an investment banking licence in order to give people more options with how they invest their money online. 

Tell us about yourself.

I originally started as a tea boy for stock brokers TD WaterHouse, eventually I got my way onto the trading floor as a market maker for investment bank KBC before my final corporate role in Corporate Finance. After meeting successful business owners taking their companies public I decided I was on the wrong side of the desk and set up my first business in 2006 qualifying students to work in investment banking. This was angel funded by billionaire Peter Hargreaves and gave me a first introduction to what it is like to secure angel funding. We had a tough run in the financial crisis so I began to channel my efforts into alternative finance and sustainable banking. I wrote the book ' Bank To The Future' on the future of finance and got more involved in not-for-profits focused on submissions for the independent commission on banking. I then decided to put a team together and build BankToTheFuture.com with our co-founder Bliss Dixon to build our Crowd-Investment Bank. We raised all our seed funding from the Crowd on our own platform and have recently launched a new record bid to raise £2m from the crowd in exchange for shares in BankToTheFuture.com

What are your motivations for doing this?

We have two missions - one to democratise investing so that anybody can be an investor in a responsible way and offer more financial inclusion to an asset class that was previously only available to the rich. Secondly we want to get more money into the productive side of the economy and help businesses get investment ready so they can secure funding from those that are really interested in what they do. It has traditionally been very hard to secure funding for a private company, especially those looking to raise less than £1m.

What will BankToTheFuture.com achieve and how quickly?

We launched into beta in August 2012 after we were endorsed by Sir Richard Branson in the Telegraph and on the Virgin website. Since then we have been working on user experience to make the investing process seamless and easy, as well as incubating businesses to make sure they are investment ready. Since then approximately £700,000 has been invested in UK companies and we are now pitching the crowd on our own platform to raise £2m to grow BankToTheFuture.com into a Crowd-Investment Bank. 

Do you think BankToTheFuture.com will follow the path of a firm like Zopa that starts as weird and soon becomes mainstream?

Zopa had a hard time as what they were doing was so new and innovative. In fact some of our team were involved in Zopa very early on and we are going through a similar stage with equity CrowdFunding. I believe very shortly our children will look back at us and ask us what it was like to be alive when financial institutions controlled the purse strings and what the world was like before everybody invested online. We are witnessing every financial product being re-created into a crowd based product and as a Crowd-Investment Bank we want to be a part of making sure that happens. We are shifting from a world where financial institutions determine who gets the money, to people determining who gets the money. Those who adopt early will be ridiculed by the orthodox  but eventually will be worshiped as CrowdFunding goes mainstream. 

How will you make that happen?

We have a great team that was involved in peer to peer lending and the building of Metro Bank, but to be honest, our destiny is in the hands of the crowd. We think that people want transparency and that in the future what gets funded will reflect the true values of society rather than a few people at a bank or venture capital firm. I am also a director of the UK CrowdFunding Association and we are heavily engaged with the FCA to make sure we get the best regulatory framework to allow this new transparent and inclusive asset class grow. We need the crowd to participate to make this happen though. 

Will this really change anything?

The major difference is transparency and the fact that what gets funded will be with the knowledge of those that fund it, but we still need large legislative changes from the government in order to allow us to compete on a more level playing fired with orthodox banks. The government have shown a great commitment to lower the barriers to startup banks and we have been involved in much of the change. CrowdFunding is one part of the change, to get real change we need to change banks so they don't own our money, can't spend our money and can’t create our money. We need a huge stimulation of local community banks like in Germany and we need to let the world know about CrowdFunding, which is essentially ideological based funding, rather than geographical based funding, as investors tend to be those that share a common vision and ideology for the business.

And is BankToTheFuture.com really a bank or a new form of dealing with money, e.g. will you get a banking licence?

We are planning to get a banking licence in a way that has never been done before. What we are doing has never been done, we are creating jobs that have never been created before and that requires new regulations and changes, but yes our plan is to become an investment bank, we have no plans on retail banking though.

For the past few years in silence, without the notice of the media, the private banks in the traditional European private banking centres have been kicking out their clients.

It has been the smaller clients with accounts in countries such as Liechtenstein, Switzerland and Luxembourg, who have faced this problem.

But still, despite the bad service and the exorbitant fees, many clients remained. Why?

Because the money held by these clients was what the banks like to refer to as grey money. This means money that has not been declared or has not been properly taxed in the account holders own tax jurisdiction. To put it bluntly, in today’s climate, this money falls under the criteria of tax evasion.

So where are these clients going to take their money? It’s a bit tricky taking it back home. Transferring a few hundred thousand euro to your account in your home country is bound to raise all kinds of red flags and a few uncomfortable questions. So many clients just decided to grin and bear it.

Now it is the end of 2013 and the banks have stopped playing nice. They have been telling smaller clients to get out and do it now.

But why are the banks kicking out smaller clients? Surely these smaller clients are profitable? Well yes they are, their assets tend to be placed in the bank's own investment funds so the percentage earned on the assets is way in excess of what medium and larger size clients pay. It all comes down to the end of banking secrecy, which brings with it two issues:

1. Administrative. You cannot now open an account with a private bank unless you sign a declaration stating that you are in compliance with tax rules in the country where you are tax liable. Many banks also require that you sign a power of attorney to the bank to automatically provide information to your relevant tax authorities. In these matters both a client with 500 000 euros and a client with 5 000 000 euros put the same administrative burden on the bank. Which client do you think the bank prefers to serve?
2. Image risk. As mentioned above the money in question is “grey” therefore it carries image risk for the bank. Once automatic exchange of information begins there is the very real threat to the banks that some famous and/or public individual has a smaller account somewhere and when that is discovered the banks name will be plastered all over the media and dragged through the mud along with the client. Not a desirable scenario for any bank.
   

What I am writing here is not opinion, it is documented fact. Luxembourg, Liechtenstein and Switzerland are signatories to the OECD Convention on Mutual Administrative Assistance in Tax Matters.  Which is just one step in a long path towards further transparency ending in automatic exchange of information.

2015 will actually be a historic year for private banking in Europe and the EU as Luxembourg begins automatic exchange of information. For anyone who has been involved in the private banking business during the last years, they are in little doubt that Liechtenstein and Switzerland will follow very quickly.

Understand this now, because I still have trouble getting it in to the heads of some people. Banking secrecy in Europe is dead.