Earlier this week, UBS revealed that its Yield Enhancement Strategy or YES that manages $5 billion, has lost at least $60 million YTD of investor money at its retail client accounts. Ordinarily, this would come as no surprise at a hedge fund and would hardly make the news but the irony is that this strategy was portrayed as a “low risk” option to its retail clients by the UBS team managing private client portfolios.

It turns out that the “low-risk” strategy was anything but low risk. It involved playing in the “options” market with clients money – making “calls” and “puts” on the S&P 500 index and hoping somehow to mitigate risk and making money in the process. In other times, this strategy may have worked and we would have never heard about this “innovative” strategy by UBS. But, in this age of “tweet” driven whipsawing in the market, they simply fell prey to a risky strategy gone bad. As an aside, playing the options market even for institutional clients is a very dangerous game and for retail investors investors looking for low risk, it is a complete no-no.

One of their clients put $3 million in the YES program is down $750K and her friendly advisor supposedly said to her that “if the world came to an end tomorrow, you would be the only one with any money left”. Well, she does have money left but it is substantially less and the world has not come to an end yet. But, by charging 1.75% of assets under management, the advisor (and his new Ferrari) and UBS seem to have made out pretty well.

Future Wealth’s View

There is a fundamental concept of integrity that seems to be lost on many of the financial advisors at these big banks. The problem lies not at the advisor level but at the heart of management itself at these big institutions. They seem to be incentivizing these advisors to suck money out of the client anyway they can and rewarding them for doing so, even at the peril of losing investors and their money.

The callousness of these big banks is appalling. An average 30 year old retail investor can afford to lose his entire net worth but has another 20-30 years to earn it all back. But those in their 60s, 70s or 80s are never ever going to get back the big losses from these “low risk” programs that these big banks seem to be coming up with every other month to ensnare another group of gullible retail investors.

At Future Wealth, we simply avoid putting clients’ money in highly volatile and risky “options” and  instead, invest clients money in what is right for their risk profile. And we don’t charge 1.75% of assets either for our wealthier clients. We may not be driving a new Ferrari on the commission earned by gouging our clients but our clients feel safe and secure with their investments. We have plenty to be happy about that.