THAILAND FINANCE & BANKING 2008
The Financial situation in Thailand is somewhat in the dark at the moment of writing. Oct 10th 2008 there has been speculation on the Thai Baht and with the Government spending on mega projects using Bonds there does not seem to be an alarms ringing. The Government is also in acrises but are only concerned with their own potfoilios not the people not the country. Some Banks have overloaded on their sub primes as this has not been exemplified out yet some Banks are not really saying what their present situation is like. In the meantime construction costs keep rising and there appears to be no slowness in spending or borrowing
Financial Advisers and Financial Planning
IF YOU NEED ADVICE ON INVESTING FUNDS
THEN READ THIS ARTICLE
Source Bruce Sheppard NZ in Stirring the Pot | 2:27 pm 19 August 2008
Financial advisers are not universally bad. In fact most of them are honest, well-intentioned and competent people who do a good job selling a stupid product that they honestly believe in. The product is the fund management industry and modern portfolio theory. The sales wrap for this is financial planning. While the product is suitable for some it is not suitable for most. Now the base principles of financial planning are so basic that it would be hard to get people to pay for advice, which is why financial planners are so hell-bent on getting control of other people’s money and then executing a plan. It is the activity of execution that makes them money though annuity fees to monitor the stuff they invest in, and the commissions and front end fees charged on initial execution. Because the advice is so basic, how do they encourage otherwise intelligent and successful people to part with their money? Two ways, either they say that investment is really complex and you need to be a professional to do it well, or they say to do it properly requires so much work that you need to spread the cost over a large pool thus reducing the cost to each investor.
Shall we start with the basics of preparing a financial plan.
The first step is a bit of self-realisation. This being that you won’t be dead anytime soon and that you likely will outlive your ability to work and earn. Therefore the quality of your life when you get nearer to the grave will be predicated on the resources you accumulate now. Now this might sound obvious, but for sub 30’s nothing could be further from their minds, either because they think they are immortal, or because they think they will die some time soon anyway. Now as we are also breeding later in life this mentality is creeping up the age scales. Some high earners believe that they can just do nothing until later because their earning capacity can fix it in a year or five, so why not have fun all the way up to age 60? This is true…. provided they don’t lose their job or capacity to work. Most in this category do have the intellect to take out loss of income insurance. But what you can’t insure is the drop off in your capacity to work or your desirability to an employer. While I suspect this will change over the next 15 years, the reality is that once you hit 50 if you lose your job you are going to struggle to get another one.So the time to start thinking about your future is when your last child is hitting their teenage years, because until then your future is subservient to your children’s. For most this is the mid forties, and despite what financial planners say this is not too late provided you have a reasonable income. So much for self-realisation, and mid life crisis.
The basis of a financial plan is pretty simple. To start with you just have to answer these questions:
1. What sort of life do I want when I stop working, and what roughly would it cost in today’s dollars?
These are the numbers and may well be as far as you have to go. Take an example. A couple in their 50’s, $2,700,000 in financial assets, a home worth another $1,500,000 with no debt, income will exceed expenditure for the next 10 years by another $300,000 in total and in 10 years time they would like to retire and have in today’s equivalent buying power $100,000 pa tax paid.
Now it doesn’t take a rocket scientist to work out that reinvesting bank interest on maturity for the next 10 years net of tax will probably out strip inflation, so likely ignoring inflation the retirement capital of this couple if they retired today in today’s dollars will be not less than $3,000,000, so long as nothing happens to the planned saving. If the wheels fall of that plan then they should still have $2,700,000.
Now on a pretty conservative basis, the long-term interest rate at the bank should be 6% or more and a long-term tax rate of 33%, this capital will earn them $108,000 tax paid, so they do not need to take any risk at all.This couple need do nothing; they can just leave the money in the bank and sleep peacefully.
So why would a financial planner advice such people to put funds in a basket of finance companies or equity and property managed funds? Of course in the hope that the return will be an extra percentage point or two.But why would this couple give a toss about that, their financial future is certain, they don’t need to take risk at all? Now of course they are sold risk on the basis of greed for extra return, so greed is what drives it. But how do financial planners sleep at night when they use greed to sell people product they don’t need? Now if the maths is less compelling some further questions need to be examined.
1. How secure is my income between now and when I retire?
Now these questions are only relevant to a family that looks like they might get to enough but it is too close to call and the short terms risks to health, job security and economic volatility need to be mitigated. The mitigation is pricing in insurance where possible, and spreading the asset allocation between growth and non-growth assets, mostly to mitigate tax and inflation risk.
Now for most people, the home is the growth asset, rental properties are the next growth asset, often with tax advantages attached to mitigate tax, and to the extent that non growth is even considered, it will be a bank or finance company deposit. Now obviously this is an extreme risk concentration on country and on property, and over the next decade is unlikely to do the goods.
In short a classic a family with less than $25 in assets for each $1 of income that they aspire to have at some point in the future, will need to consider taking on some risk just to mitigate personal and macro economic risks, and could do with some advise from a financial planner.Then you have the dreamer group, those who want heaps, but have little and are not prepared to do much either. I am sure financial planners get many who think they are rich.
Another example: Couple with $500,000, and a home worth $1m which they intend to keep until they die, who want $100,000 pa tax paid when they retire, and intend to do this in 10 years time, but have no intention of saving.
For them the financial planner has to ask some really hard and unpleasant questions:
1. Do you really need to own your home; could you trade down or better trade into a rental situation?
Or the end result is, sorry team you will only have $25,000 pa to retire on, and at this level you won’t be able to afford to own the house anyway.
The purpose of these two little case studies is to point out that people should only take risk with their investment capital because they need to or want to. Those who need to take risk are those who do not have a clear proposition that they can have the life they want from the resources they have now. But before they consider taking risk, which will involve both work and the prospect of loss, they should consider the alternative of saving more or wanting less. If having reduced their expectations and increased their savings effort they still do not get a result that works then they must set about making their money work harder, i.e. taking on board risk. For those who need to take risk, they only have two choices, do it themselves or pay someone to do it for them.
So here is a list of questions for any potential adviser.
1. What are the fixed costs, how do you charge for your time?
Now for most of these guys this is what you will find:
• The establishment fees will be between 1 and 3% of the money you invest with them, this is the advise for the financial plan. Don’t agree to this, the most you should pay is $3k. The plan is not hard and what is more for most of these guys the plans involve limited customisation anyway.
• Monitoring and custodial fees will cost between .7 and 1.5% pa. The book keeping alone and tax crap is around .5% so the balance is these guys looking after you, make sure you find out what exactly you get for this. Mostly these planners roll your money up with everyone else’s and they monitor the whole pool in one hit. Mostly they don’t do much rebalancing or predictive movement of capital, which is why of course many of their clients got caught in the finance company collapses.
• The funds managers they use will also charge entry, exit fees and annual fees based on funds managed and they can be up to 5% pa. Mostly they are between 1 and 2% pa.
• The fund managers will also pay commissions from the front end fees to the planners. Make sure these are disclosed and add them on to the set up cost, because in effect this is just another way of being paid for doing the financial plan, make sure it is rebated to you.
• Now here is the biggie. I am yet to meet a financial planner who eats his own porridge. He expects you to put all your money with him and buy a portfolio of managed funds. Ask the planner you are talking to what he is doing with his money? If you are lucky they might have some of their money in their own product, if so ask to see their personal investment reports for as long as they have been involved in the industry.
If on their own money they have not done well, then I guess you can assume they won’t do well for you either. Now of course he might say to you well I am new in this game, and I am still paying off my home and I have nothing to invest. They have to start somewhere but before you appoint them ask to meet the senior planner in the firm, there will be one, and ask to see what he does.
Ask to see his whole balance sheet, how much has he got in the firm’s products relative to his total portfolio, how has his portfolio performed, has he been taking money out and putting it in, has he been trying to guess timing, find out how this guy got to the top of the tree.
Again I have to tell you that mostly even the successful ones do not invest in the stuff they are trying to sell you, or if they do it is very minor and what is more they do try to guess timing. What you are looking for is someone who does for himself what he wants to do for you, and can demonstrate with his own affairs that it works.
• Now if you get past this question, and for most you won’t, then you ask the last three questions. Size is not that important, big gives them buying power, small gives them speed, by the time you have got through the question about where they put their money you will know if the organisation needs to be big or small. The questions about litigation are about how effective they have been, If there is a lot of it and plenty of liability falling on the planner even if he does do for others what he does for himself, give him a miss.
Now assuming you do find a planner, what are your chances of beating a bank term deposit? Let us ignore the front-end fees on the basis that you get a valuable plan out of that, so it is money well spent, and just look at the costs. Including the planners and funds mangers fees the dead weight cost is around 4% pa and possibly more.
The long run net of tax return on bank deposits is around 5%, so a balanced portfolio of managed funds pre costs has to average around 8% in nominal dollar returns post tax. The costs are mostly tax deductible.An average portfolio will have between 20 and 50% in cash and fixed interest, which will yield 5% and the growth assets will be in equities or property, which over the long haul have produced on average around 9%. Do the maths team, you can’t beat the bank. Stay with cash if you are going to use a fund manager, or at the very least, manage your own fixed interest funds and only let the planner play with the growth assets.
But even then unless you beat the market you won’t do better than leaving the funds in the bank due to the cost structure. Now here is the real kicker, portfolio theory which all these guys sell, is predicated on spreading it around so you earn the market average. So don’t hold your breath on beating the market over the long term! Like it or lump it, if you need to make your money work harder, then smell the roses. You are going to have to do it yourself. But before you do so an honest talk with an honest planner for an honest fee is not a bad idea
LEHMANS BANKRUPT BUT GUESS WHO GOT THEIR MONEY:
The bailout helps the Execs and banks not the taxpayers and in fact thery lose out completely. The firm Lehmans, in the days before it filed for bankruptcy, sought board approval to pay three departing executives more than $20 million, according to Waxman."Even as Mr. Fuld was pleading ... for a federal rescue, Lehman continued to squander millions on executive compensation," Waxman displayed a chart that detailed what he said was $480 million in compensation since 2000 and pointed out that Fuld owned a $14 million oceanfront home in Florida, an extensive art collection and another home in Sun Valley, Idaho. "Your company is now bankrupt, the economy is in a state of crisis, yet you get to bring home $480 million," said Waxman. "Is this fair, when the CEO of a company that's bankrupt has made that much money?" Now guess what all the other Execs of therse bankrupt companies have taken home????? and you will see whay you should not invest in finance companies etc
Ben Jenkins, head of Wachovia's general bank, would receive $13.3 million in severance payments and a pro-rated bonus of $3.7 million. Steve Cummings, head of corporate and investment banking, would get $12.8 million in severance and a bonus of $3.75 million. And David Carroll, head of capital management, would get $10.3 million in severance and a $2.75 million bonus. The government assisted in the deal. As for CEO Robert Steel, we applauded his move in July to use his own money to buy $16 million worth of Wachovia stock (in the $15 to $17 a share range). He's going to lose most of that, but he put his money where his mouth was. He deserves credit. Merrill Lynch's newly recruited chief executive, John Thain, stands to share a $200m (£111.4m) payout with two senior lieutenants for less than a year's work which culminated this week in the bank surrendering its 94-year-old independence.
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