Can private banking clients sue their advisors?

June 15, 2009 | Comments Off on Can private banking clients sue their advisors?

In short, the answer is YES. However, clients have to prove that their losses are direct results of negligence on the private bankers part.

When the market is hot and everyone is making money, life is easy for wealth advisers. Advisers take their clients to lunch at Four Seasons, or go for a round of golf. Everyone is happy to see their net worth mushroomed. But what happened when things go badly? The banker-client relationship can turn sour pretty quickly and things can get ugly. And trust me, sometimes they do.

The recent economic slowdown is a catalyst of a series of lawsuits targetted at wealth management firms and private banks. Investor Andrea Barron sued Swiss private bank Union Bancaire Privée (UBP) for feeder funds associated with Bernard Madoff, a convicted Ponzi scheme operator. Barron claimed the private bank had breached their fiduciary and professional responsibilities to carry out due diligence. In Singapore, tycoon Oei Hong Leong sued Citigroup private bank for the $684 million loss incurred in 2008. Oei claimed that he had to close positions at huge losses in a volatile market. UBS was forced to buy back some of the mortgage backed securities sold to their wealth management clients.

Most wealth management executives will consult with their WM clients regularly to understand their risk tolerance levels. Many tycoons and high net worth individuals use multiple private banks to manage their investment. It is not uncommon for someone to split their assets between UBS, HSBC Private Bank and Goldman PB. This practice is common among the rich for risk management. WM Clients who have multiple accounts with different banks tend to understand better that their losses are results of a turbulant market, rather than incompetent managers in most cases. However, clients who only have a single account with one bank tend to see that their losses are results of bad money management.

To ease the relationship between clients and bankers, many private banks agree to lend their client cash at a low interest rate that will cover for 100% of the face value of toxic securities in the portfolio.


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