Analysis / Fattal flaws

David Fattal owns the hotel chain that bears his family name, so you can't say he's either a naif or a pushover. Nor was he born with a silver spoon in his mouth.

He began his professional career as a security officer at the Dan Carmel hotel and over the past decade has built an empire that runs 16 hotels in Israel. Yet despite his experience and savvy, Fattal chose to invest NIS 3 million with a young whippersnapper, one Ido Samuel, who managed to lose the lot in about three hours.

What on earth was Fattal thinking? More importantly, what did he not do that he should have done when choosing a portfolio manager?

This should have been Fattal's first rule: To give his portfolio to a recognized portfolio management company listed with the ISA and included in the ISA's list of licensed companies on its Web site. Such a company needs equity and appropriate securities - so that someone will be answerable in the event of unreasonable losses.

Management fees are usually 1%-2% of the assets (a year - depending on the size and nature of the portfolio) and are determined in advance. The kickbacks, however, are not transparent, and can amount to huge sums.

When trading in options, portfolio managers charge NIS 3-5 per option, while the banks charge the managers NIS 0.70 per option. The portfolio manager keeps the difference, which can amount to thousands of shekels per transaction.

The portfolio manager's secret goal is to roll over, or "churn," the client's portfolio much as possible, a practice which isn't necessarily to the client's benefit. Churning is one of the oldest tricks in the financial world, and is geared to fleecing the client. Samuel is suspected of executing tens of thousands of transactions in Fattal's portfolio in the course of a few days, such that even if he had not lost on the trades, Samuel would have pocketed a substantial share of Fattal's money via the kickbacks

Someone who claims he can obtain extraordinary yields is usually either taking huge risks and getting lucky, or using a pyramid scam to defraud clients. Fattal should have demanded to see the portfolio manager's performance over a long period, and verified the figures. He should have talked to other clients, learned more about Samuel's investment methods - and remembered that even then past success is no guarantee of repeat performances in the future.

Even the most experienced and cautious investment managers in Israel and around the world have difficulty beating the markets and the indices - so why should Samuel be any better?

Of course there are people who know how to profit from options, but they are expert market makers who are not gambling on the market's direction. They make money by selling expensive options to speculators.

Before investing significant sums, always investigate who is going to manage your money; what he is allowed to do with it, and what recourse you will have if he loses your shirt.