Are Bank Hapoalim (TASE: POLI) and First International Bank of Israel (TASE: FTIN1;FTIN5) instructing their investment advisors to channel customers seeking management of investment portfolios to invest with companies that they own? "Globes" has obtained recordings of conversations with investment advisors which claim that Bank Hapoalim instructed its investment advisors to recommend to customers seeking portfolio management only its subsidiary Peilim-Portfolio Management Company Ltd.
The recordings also indicate that First International Bank compensates branches that direct customers to its subsidiaries Ubank Ltd. and Modus Selective Investment Management and Advice Ltd.
"Just like a customer makes a foreign currency transaction, I am rewarded in some way in my quarterly report. The branch ultimately wants the bottom line (laughter), what's to be done… Yes. They wanted…it’s a good way, now it gives some sort of incentive," a First International branch manager in Tel Aviv is heard saying in a recording.
The same branch manager said that the bank's official position was that is forbidden to give such a preference, but, he says, "It's enough that you give a good enough candy."
"Sirkis (First International Bank EVP Client Assets Management Yoram Sirkis) said that the entire issue of forbidding preference was terribly important to him; it was terribly important to him that our advice is real. He will never instruct us to direct, but it's not necessary to direct, the advisors understand it by themselves."
Bank Hapoalim investment advisors say that they should only recommend Peilim to customers seeking portfolio management. Although the advisors show customers a list of all registered portfolio managers approved by Bank Hapoalim, they only recommend Peilim.
"Peilim is the only one that we're allowed to explicitly sell. I can say that there is this one and that one (referring to other portfolio managers), take the phone numbers… that's allowed," an investment manager at a Bank Hapoalim branch in Herzliya is heard saying. He said, "We were warned not to allow other investment houses to enter."
The advisors, fearful of violating the guidelines, in part out of fear for their jobs, were compelled to toe the line. The result is liable to lead to misleading advice to customers. "I do not violate the bank's procedures. Period," said one Bank Hapoalim advisor.
"Bank Hapoalim advisors may not meet other portfolio managers," says an investment advisor at the bank. "I received explicit instructions forbidding me to meet with investment houses. We may not receive faxes or e-mails from them. The bank's procedures allow us to only recommend Peilim. I can show a customer a list (of portfolio managers), and say there is this one and that one, and take whom you please."
Another advisor at a Bank Hapoalim branch in Tel Aviv said, "We're only allowed to recommend Peilim. If they (the customers) want to manage portfolios, I tell them that Peilim is our subsidiary.
Sources inform ''Globes'' that a bank advisor who recommended a portfolio manager that was not Peilim was severely reprimanded. "Management gave me trouble. A regional advisor turned up and told me unequivocally… I told him that I acted in good faith," says the reprimanded advisor.
It's similar at First International Bank. Although First International has not given its advisors instructions to recommend only the bank's own portfolio managers at Ubank and Modus Selective, the bank's management has created a mechanism of incentives to motivate branches to recommend clients to use these portfolio managers.
First International Bank's management rewards branches that direct to Ubank and Modus Selective, and investment advisors, who want their branch to get the reward, frequently recommend them to clients. "Every branch is an independent profit unit," says a private banking investment advisor at a First International Bank branch in the Sharon. "There is also competition between the branches, and the branches are measured."
Other First International Bank investment advisors said that the branches' reward is 1-2% of the value of the customers' portfolios, although it should be noted that this is an internal estimate by management vis-à-vis the branches not vis-à-vis the advisors. It also does not include the management fees paid by the customer.
"Management wants progress," is how one advisor defined it.
Responses
Bank Hapoalim denies that there is any policy or instructions to investment advisors to give preference to Peilim, or to recommend only it to customers.
Bank Hapoalim said in response, "The bank considers the management of customers' investment portfolios via portfolio managers as one of the range of services that it offers its customers. These services are offered to more than 100 companies engaged in investment portfolio management, and a customer's contract with a portfolio manager makes possible the execution of activity via the bank. Currently, more than two-thirds of the securities portfolios of the bank's customers are managed by portfolio managers at companies that are not Peilim.
"Directing a bank customer to service from Peilim or any other portfolio investment management company is in no way an 'investment consultancy policy', and definitely does not fall under the definition of investment advice in the Investment Advice Law. We're talking about receiving a service via an authorized company, and in view of the advantages of Peilim, which engages solely in portfolio management and has no conflicts of interests, it is natural that the bank will advise customers to accept an offer from Peilim."
First International Bank confirmed that branches are rewarded for directing customers to Ubank and Modus, but in the same breath said, "The professional guideline for advisors is to recommend three different managers. There is no instruction that one of them should be Modus or Ubank. In fact, Modus has only 14% of managers for First International customers, and Ubank has even less."
First International Bank confirmed that the abovementioned rewards are in the form of "internal accounting" by the bank for rewarding branches for their various activities.
The Israel Securities Authority said, "In order to deal with the issue of banks' investment advisors directing clients to the banks' own portfolio management companies, in October 2009, the Securities Authority sent the Association of Banks in Israel a draft circular that it intends to publish. It states that directing a customer to a portfolio management company in order to obtain a direct or indirect benefit is improper conduct by the licensee."
The Securities Authority added that it has been meeting representatives of the Association of Banks to discuss the circular and its ramifications, and that they are now discussing the final version for publication.
The Securities Authority said that since this was not a matter of advising on the purchase or a security or financial asset, but mediation for the provision of a service, directing a customer to particular portfolio manager was not investment advice as intended by the Regulation of Investment Advice and Investment Portfolio Management Law (5755-1995).
The Securities Authority nevertheless holds that, "in view of the investment advisor's fiduciary trust to his clients and his objective image in the customer's eyes, directing the customer to a portfolio manager should be based only on the advisor's independent evaluation, looking out only for what is best for the customer."
Published by Globes [online], Israel business news - www.globes-online.com - on May 13, 2010
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