Professional asset destruction – by product sellers in private banking

– How the wealthy and the very wealthy get ripped off by the bank(st)er -.

It is not only the financial crisis that motivates wealthy investors to change banks or asset managers every three years or so. Client disappointment with investment banking product salespeople runs deep?

Uncertainty and doubts about competence, but also the fear of commission-driven sales advice without regard for the interests of the customer, make for reticence. In addition, there is a certain amount of shame, because the clients believed that they understood the activities of the advisor or were “in control” themselves – until considerable asset losses taught them otherwise. The willingness to take misadvice to court is increasing – but it is not a solution for the future.

Example real estate bubble

As early as the end of the 1980s, Germany experienced a real estate bubble, driven by financing of real estate for “retirement provision”. The only catch: the amount financed by the banks, including sales costs, was often three to five times the market value. One calls this then scrap real estate, and some attracts actually also today again the public, if the blaster finishes the work. Later, a bankster says “you can see how generous we were – who else would have financed you with “hot air”?

Income millionaires, such as a Bavarian notary, but also bricklayers, soon learned the ins and outs of German insolvency proceedings. When, from the end of the 1990s onwards, such bad loans were sold on to investors as “unsecurities”, some financial institutions erected a monument to their own incompetence. Instead of questioning creditworthiness, people believed in ratings based on misunderstood probability considerations that had long since been overtaken by reality, and lost sight of the risks that were actually developing. Since then, numerous financial houses have been trying to hide the stock of (almost) worthless toxic securities on their balance sheets. The few very well positioned banks and insurers are sometimes reluctant to highlight their proven risk competence.

Example Lehman bankruptcy

Michael Rubens Bloomberg, mayor of New York City, is founder of the financial agency Bloomberg L.P. Any half-educated banker could have used the information available many months before the Lehman bankruptcy to recognize the increasing risk of investing in Lehman securities. If today the founder of SAP has to file a claim for 977 million US dollars, one will also ask who is responsible for the risk monitoring on the part of the investor? Hardly any customer receives a regular report from his bank on the changes in risk in his investments – case law places this solely in the responsibility of the customer, who would have to afford his own controlling for this. It becomes delicate when individual internationally operating private banks provide their wealthy private clients with “performance reports” for years, the arithmetical inaccuracy of which can be proven with the four basic arithmetic operations. The control with customers and advisors ends with the look at the sum.

Example Madoff document falsifications

Particularly bitter for the financial industry is the finding that not only private, but also institutional investors as well as supervisory authorities have not effectively controlled their asset managers. In the “Phoenix-Kapitaldienst” case, an auditing firm appointed by BaFin had overlooked the absence of a three-digit million sum despite a special audit assignment. Of course, in case of doubt, the state is not liable for its “supervision” – the controlling task is left to the wealthy and institutional investors.

Insurers – the exception?

Insurers in particular, however, do not show their cards – they refer to their business secrets and the “strict” supervision by BaFin, and otherwise simply demand trust from their customers, especially since everything has gone well so far. The individual cases of emergency bailouts of life insurers, embezzlements, prosecutorial investigations, arrests, convictions and suicides of directors are quickly forgotten.

Example risk balance sheet

Gone are the days of choosing a banking partner or investment product and going without monitoring advisors and investments for many years. To this day, numerous financial institutions are known whose advisors speculated with their clients’ money – in order to generate tidy bonuses along the way. Even deficiencies in the internal control system of some banks from Germany or Switzerland, which have been known for years, have apparently not been remedied to this day. Savings are made in risk monitoring systems, but also in documentation – the risk is then borne by the investor.

Example Offshore Banking

With the term “International Wealth Management Centres”, bankers want to sell old wine in new bottles. The prerequisite for the customer’s desire for tax savings is by no means the so-called second passport. Typical tax evasion by the bank can be found in the “Expert opinion from wealth management”, when it legally erroneously states “since you only have a holiday home in Germany, you are tax-free with the rest of your assets there”. The signature of a foreign tax or business advisor suggests that the banker and his appraiser only want a suspected loophole discovered. At the latest when the tax investigator is standing in front of the door, the dream of serious advice on tax structuring is shattered. Even simple life insurance policies offer completely tax-free returns – but the most complex products are sold, presumably precisely because they are not understood.

by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm

by courtesy of (published in Computers in the Trades, issue 05-06/2010, pages 5-6)

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About the author

Dr. Johannes Fiala Dr. Johannes Fiala

Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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