I recently had two intriguing and similar discussions. One with a practising private banker and one with a client of one of the private banks in Singapore.
I asked the banker, an experienced veteran in this industry, how he defines success. His answer: “As long as I give my clients the right investment ideas, I can be considered successful.”
I asked the client a similar question: “When do you consider your private banker to be a great banker?” His answer: ”I think my banker is great if she helps me to find good investment opportunities.”
Both then went on to define good investment opportunities in terms of ‘higher than average investment returns’.
Where is the value-add?
The banker and the client seem to agree with each other; what the client expects from the banker is precisely what the banker believes to be his role. So that sounds perfect. What’s the issue?
The problem is that both seem to under-estimate the true value-adding potential of a wealth management professional.
Private bankers are not fortune-tellers. They cannot predict the future, no matter how closely they follow the market. If we define ‘success’ in terms of something we cannot control, we live in a stressful world.
“As we believe that the Japanese yen is very weak at present and most likely about to recover, we believe it is a good time to invest in product ABC.” Once sold, there is nothing more you can do than pray hard that the yen indeed strengthens. That is stressful.
Why don’t we simply promise what we are able to deliver – trying to achieve an agreed investment return whilst taking the least possible risk? The ability to manage investment risks is what separates the investment professional from the investment hobbyist. It certainly is not the ability to predict the future.
There is no study that prepares us for predicting who will win the presidential elections in the US, when corporate or public scandals emerge, or if and when armed conflicts will develop.
We are able though to manage the many uncertainties in this world in a proven and sophisticated manner, thus reducing the risk that in our efforts to achieve a certain return we end up losing it all. If it is your ambition to enjoy a 4% return, then why taking risks that could lead to 10% return? Of course, 10% is much better than 4%, but the potential downside of going for a 10% return may be way too excessive for an investor looking for 4%.
When it comes to investing, success should be measured in terms of the risk taken in our efforts to achieve a certain return.
I am not pretending that this is a new insight. However, the fact that this is commonly known makes it even more disturbing.
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