whittington3.jpgThe soap company’s marketing head is taking the CEO through the plans for the new product launch. He shows the big boss two versions of the new soap, one that costs $10 and one $20. When the CEO asks, “What’s the difference?” the marketing whiz replies, “No difference, sir, some people like to pay ten, some like to pay twenty.” I was reminded of this ancient joke while I was talking to an acquaintance of mine whose job it is to sell investment products to very rich people in a part of the world that is exceptionally well-endowed with such people. My friend was extolling the virtues of ‘high-end’ portfolio management type of products, which I have never thought to be a good way to invest. “You don’t understand how the really rich think. They want exclusivity. These guys already have all the money they need – what they want is an investment product that is made specifically for them.”

This really struck a chord in mind, more so because, as it happens, I have with me a great deal of first-hand information about the performance of Portfolio Management Schemes. Over the last few months a lot of people have gotten in touch with me complaining about how they’re making less money in these schemes than they would have made had they invested even in average equity funds.

Read

Looking at the details of these people’s returns from (PMS) is a revelation. In many cases, the raw returns are what an average or at most a second quartile diversified equity fund would have given them. But once one deducts the amazing fees that PMS’s charge, and deducts the tax hit that is delivered by many of these schemes’ completely tax-oblivious way of booking profits, what is actually left for the investor is a pathetic apology compared to what they could have gained by investing in almost any equity fund with a good long-term track record.

The sad part of the story is that some of these PMS’s are operated by the very same outfits whose own fund companies delivered much superior returns. But of course, fund companies’ profits are a pittance compared to what PMS’s earn.

Why are more and more people falling for this racket? Obviously, because of hard-selling of the ‘exclusivity’ that these schemes provide, coupled with the complete lack of transparency about PMS returns. Mutual funds have to make claims that are backed with public revelation of data but PMS salesmen can get by with just whispering an unapprovable claim in your ear.

Here’s a piece of advice for PMS customers. Since you are a PMS customer, you are obviously rich. Just as obviously, you didn’t get rich because you are stupid about money. At a guess, you are probably much smarter about money than the average guy, which is why you are rich.

I’m sure you like buying and using nice things–products and services that are a privilege of wealth. That’s the whole point of being rich–it’s what makes it more fun to be rich than it is to be unrich. However, do yourself a favor–spend your money on things that the unrich can’t buy instead of wasting it by paying more than the unrich do for the same stuff. Buy a beach villa (or on the French Riviera) instead of co-op flat, buy a limousine instead of that small car, commute in a helicopter instead of a limousine, bribe a minister instead of a clerk, keep an expensive mistress instead of a well, whatever. But DO NOT pay more to a PMS and end up with less return than the unrich get in a plain old mutual fund.