Banking is a Relationship Business

The good news: I finally managed to buy US-listed ETFs (in a 100% legit way. I have a cousin who pretended to live somewhere by photoshopping utility bills to bypass regulations/restrictions; amazingly, he never encountered any issue by willingly taking “risks” that his local Regulator deemed to be too big for him. On the other side, his father lost a non-negligible amount of money by investing in his bank subordinated bonds, sold to him by the bank itself: for the same Regulator, a bank labelling its own debt as super-safe in order to sell, was a fine process).

The bad news is that getting there was not as straightforward as you, and I, would expect it to be. Along the journey, I collected a couple of lessons (and a trick?) that might be useful for you as well.

How we got here

I started to invest (should I say trade?) when ETFs did not exist. Or maybe they did but they were as popular as Bitcoin in 2015. I was living in Italy, so not exactly the land of investing opportunities. Even from a learning perspective, everything that I read was about the US market, or Japan (a lot of people were looking for a new rally after the ’89 crash…and they still are), or commodities, or…anything but what was accessible to Italian retail investors. I remember an article about the Dogs of the DOW strategy and how to apply it to Italian stocks; unfortunately, even the best long-only strategy can only generate lousy returns when applied to a market that is in a long-term downtrend.

The unique way to get exposure to other markets was via mutual funds, but getting access to mutual funds was almost impossible. Unless you wanted to invest in the mutual funds managed by the bank you were dealing with. A nice prospect of Medallion-like fees for a third grade-like money management skills. The system was so rigged that even the Italian Football League was ashamed of it.

I knew there were great money managers out there, or can you believe it?!?, funds that provided a plain, non-active, exposure to a certain market but there was no way to participate with my money.

Then ETFs arrived and all the above issues disappeared as if Thanos snapped his fingers: investors would not need intermediaries and distributor networks no more, only access to the stock exchange where the fund was listed. Sure, brokers were charging higher fees if I wanted to trade stuff listed in the US but that was a small nuisance compared to the gain in freedom and independence.

I like capitalism, only when it benefits me (said the Bank)

The playing field was level, investors from everywhere, rich and poor, had access to the same shit. They were free to do what they wanted with their money, take risks and bear the consequences.

Too good to be true? Enter the “*” next to it is a free market. Well, this is verbatim what you can find nowadays on the EU website:

“As part of its effort to create a barrier-free market for collective investment funds, the EU enacted the following legislation”

That “legislation”, being MiFiD, MiFiD II or UCITS, boring stuff that I have no willingness to explain, created barriers. I guess we can have an endless debate if and when the legislator should limit everyone’s freedom in order to provide safety to society. I get the principle.

But it is hard to draw a line between legislation that is done in good faith and one lobbied by local banks, which are ETF providers as well, that want to protect their market share. Regulation is the best moat for incumbents.

I do not think European banks have any particular appetite to go to the US to compete with Vanguard. On the other side, EU regulation meaningfully increases the costs for any US-based player that wants to offer its products to EU investors. MiFiD might keep bad wolfs far from helpless German savers, but it also precludes the smart ones from accessing goodies from Cambria and Alpha Architect.

I do not know why shops that are already present in Europe, like WisdomTree and bloody-BlackRock, do not offer EU-compliant versions of all their products: they have the resources, but it means it is a costly and painful process. So much for the barrier-free….

Just KIIDing

I am pretty sure I was already living in London in 2018. I moved so many times that I gave up trying to remember when I was where. For the same reason, I never migrated all my bank accounts from one country to another. It must have been around that time that the Italian broker I was using told me I could not buy any more $GAA. The error message was like “bla bla regulation bla bla KIID bla bla sorry, ciao”. I was so disoriented that I wrote to Meb Faber on Twitter soliciting him to scold his slaves and tick the necessary regulatory box. Because I thought it was just a matter of a tick. No wonder why he never replied to me.

I finally enquired about the Italian broker customer service and they illuminated me with the details of the new regulation in place. Despite the fact that I spent more than a decade managing billions (in very boring instruments, with very strict risk management rules), my account was marked with the scarlet “R”: the MiFiD King bestowed me the retail-investor title and from that day on I was granted the same freedom as a retarded investor.

So much for my hope that, now living in the land of retarded Brexiters, this stupid European law would be the first to be chopped. Brexit delivered EVERYTHING, from Middle Ages measurement systems to crowns stamped on beer glasses. But no. MiFiD & friends resisted like cockroaches after a nuclear catastrophe.

Livin in America Switzerland

Last month I moved to Switzerland, the land of the MiFiD-free. A country that managed to stay outside Europe without alienating Europeans living here (ok, the fact that they ruled Amazon illegal IS annoying).

Irresponsibly high on my To-Do List was the task: tell Interactive Brokers I am now a Swiss resident so that I can start buying US-listed ETFs. When we moved from Switzerland to London, my wife cried. When we moved back from London to Switzerland, my wife cried even more. I guess my push on IB was a not-so-unconscious way to reap an immediate benefit from the madness of moving an entire family…while I hold my fingers crossed that my wife would ultimately be on board with our new life.

I updated my profile fairly quickly and, once IB gave the green light that I was indeed registered as a Swiss resident, I went to buy $DBMF.

Error. The same error I got when I was living in London.

So I wrote to IB Customer Service. They justified themselves this way:

The ticker DBMF is a US ETF, opening orders from retail investors residing in the European Economic Area (EEA) who attempt to enter an opening order that are associated with a product that does not comply with the EU’s Packaged Retail and Insurance-based Investment Product Regulation (PRIIPS) will be rejected. The regulation is intended to enhance understanding of these products through the provision of disclosure documentation. This documentation is referred to as the Key Information Document (or “KID”) which provides information such as product description, costs, risks & performance.

I replied with a Wikipedia link, showing that Switzerland is not part of the EEA. They acknowledged my point but managed to demonstrate (once again) how low is the bar for a ChatBot to surpass a (kind of) human brain:

Switzerland tax payers are not subjected to PRIIPS regulations but please do note that your MiFID category is Retail and Retail clients can only trade ETFs such as DBMF if the KIID document is available for it in the language approved for your country.

Steps on How to find a KID…

Now, if you are confused about whether the document is called KID or KIID, welcome to the party. But that’s not the point. I should not have any “MiFiD category” assigned to my profile because MiFiD is a European regulation and Switzerland is not subject to it.

Go figure out how to explain it to a non-ChatBot that has his primary configuration set to deny any incoming request. This…or I can find a more creative way to achieve the same result and have a nice topic for my next blog post.

Tabula Rasa

I opened a new account on IB, from scratch, providing EXACTLY the same information I submitted for the other one. The only difference is that this version of me has never lived in Europe UK before. This version of me has never filled out a MiFiD form because IB is not required to make me sign one when I open an account as a Swiss taxpayer. Therefore, this version of me is free from any legacy, and absolutely not relevant, MiFiD categorisation.

As expected, once the account was live I managed to buy all the US-listed ETFs I wanted.

The ironic part of this story is that, even with this evidence, I cannot point out to IB that they should also free my legacy account from any MiFiD restrictions. Because I bet Thomas Peterffy’s wealth they would take the “conservative approach” and strip me of the rights I have on the new account. It is more convenient for them to lose me as a client, any other Swiss broker would not have any issue letting me buy US-listed ETFs, than risk a fine from the European Regulator, however remote that chance is.

And this is because I have no human relationship with IB. I have a history, I have a record, I made trades but there has never been any verbal exchange, any banter, any shared stories attached to my profile.

Banking is a relationship business

When you open an account, the bank makes you sign a pile of documents, terms and conditions that you might think will discipline the relationship going forward. In reality, that stack of (now virtual) paper is meant to legally protect the bank under every possible circumstance. That’s it.

What you can do today, and will be able to do in the future, is at the pure discretion of the bank. No bank is legally obliged to offer banking services to you. Ask an American that is trying to open a bank account in Switzerland, even when they legally reside and work in Switzerland. If you ever lived outside your home country, you probably know what I am talking about.

Every bank website has multiple pages where you can find its fees and rates: the fact that the majority of its clients get those conditions is just because it is the most efficient way for the bank to run its business. It does not have the time, the resources and the willingness to negotiate with every client. But everything is negotiable. And the fact that you see a service listed does not necessarily mean that you will be able to access it.

Earlier in the week, I read this passage on Kris-Moontower’s Substack:

The UNG trade is also reminiscent of that trope about how a casino’s risk manager is more likely to lose sleep over an Ocean’s Eleven heist scenario than a string of bad luck at the tables.

Many bloggers, and I assume their readers too, when dealing (pun intended) with broker counterparty risk considerations arrive to a simple conclusion: as long as my assets are segregated, I am fine. That’s the casino risk manager concentrating on the bad luck scenario.

If you are really responsible for your risk management, you should worry about the bank pulling the rug under you for no reason. The biggest risk of running a leveraged portfolio is not building the wrong correlation matrix, is receiving a margin call out of the blue for no reason. Yes, the bank should not do it, as Brad Pitt should not organise a bank heist…and yet they did.

In this sense redundancy, dealing with multiple brokers, is not anymore an irrational and inefficient decision. As is opening your current account not with the bank that offers you the lowest fees but with the one that is more capable to help you in the future. One day, you might need that mortgage or that business loan and by banking with them today you are improving your future chances, even if you do not see it. Even if it is not written in the contract.

Building a ‘personal’ relationship with your bank is one of the most effective measures of risk management. Today’s fees are the premium you pay to exercise that call option in the future. Using the local post office as your banking partner just because it’s free…might not unfold to be that free to your future self, especially if you are already a millionaire (yes, I am talking to you).

While I was arguing with the IB customer service, I had a look at another Swiss broker, SwissQuote. I balked when I read their fees but then I reminded myself that having a Plan B might be cheaper anyway, especially considering that I place just a few trades per year. [No, I did not open an account with them…yet. I am a lucky customer of the late IWBank, now uber-shitty-Fideuram-Direct, and I want to close that relationship first].

What I am reading now:

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