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The Reason Your Banker Is Always Smiling

If the latest stats are to be believed, upwards of 80% of the money “invested” by Filipinos is parked in typical garden-variety savings accounts.  For tens of millions of Filipinos, having a savings account is regarded as safe, practical and prudent.

These same savings account holders would be astounded to learn, however, that relative to returns banks charge higher fees than the world’s top hedge fund managers.

How is this possible?  It’s simple math, actually.

Behind the Scenes at Your Bank

The glossy brochure in the bank lobby offers a savings account with  a whopping 1.5% per annum (for those of us who don’t speak Latin that’s per year).  Behind the scenes, they take your deposit, pool it with the savings of other unsophisticated investors,  and buy a government bond with a fixed rate of interest, say 6%.

By the end of the year, assuming your account hasn’t dipped below the minimum required monthly balance, the bank gives you your 1.5% and keeps 4.5%.  In other words, you get 25% of the total return and the bank gets 75% of the total return.

Your Banker vs. George Soros

By contrast, let’s say you’re fortunate enough to be in a hedge fund managed by George Soros in his heyday, and this fund also generates a 6% return for the year.  George, like most world-class hedge-fund managers, would typically charge a fee of 20% against the return. Take note, however, that many funds have a “hurdle” provision–meaning the performance fee is only 10% of the return for annual returns of 0-10%, then escalates to 20% of the return for annual returns above 10%.

Meaning, if Soros’ fund only produced a measly 6% return, due to the “hurdle” provision his performance fee would likely be only 10%–George would give you 5.4% and he would keep .6%.  In other words, you get 90% of the total return and George Soros gets 10% of the total return

There you have it.  Against a 6% annual return, George Soros’ fee would be 10% of the return.  Your banker, on the other hand, walks away with 75% of the return–over seven times the fee of George Soros!

No wonder your bank is always happy to see you!