I’m no fan of binding arbitration in the securities industry or elsewhere. It’s unfair to consumers and subverts the judicial process, which is a foundation of the constitution.

Unfortunately, it is a reality, though the situation has been improving somewhat over the past several years. Another sign of movement within the status quo to at least provide more of an appearance of fairness may be in the works.

Investment News reported yesterday that FINRA may decide to tighten standards around who can serve as a “public” arbitrator in a securities case. This is a move in the right direction, because a public arbitrator is supposed to be someone who is independent without an agenda or bias towards either party in a securities case.

Currently, former securities industry attorneys, brokers and others who have been affiliated with the industry can serve as arbitrators, it illustrates just how broken the system is. Pending a favorable outcome on the FINRA vote tomorrow, this system will get a bit more fair.

I’m hopefully, perhaps naively so, that the SEC may take steps to strike down or severely restrict the use of binding arbitration in securities disputes and allow Americans to access the justice system to pursue claims against the brokerage industry. That’s ultimately the only just forum to hear disputes between some of the world’s largest financial services corporations and others and consumers.

It could actually serve to level the playing field, and give consumers a chance to be heard and receive some justice. Stay tuned…

In the financial advisory industry, there is a push towards advisors identifying their ideal client type. It makes sense, because it is a vital part of branding and helps a firm define itself versus the competition and figure out what types of clients the advisors can best serve.

Unfortunately, the answer can all too easy default to the lowest common denominator: rich people. Hey, who doesn’t want rich people as clients? I don’t think there are many financial advisors — or any business owners, in fact — who would object to having rich people as clients.

Seriously, there are several problems with casting a net that wide:

  • Too broad: Rich people are a huge group and by trying to be everything to everybody, it is more likely your firm will end up representing nothing to anyone.
  • Too unfocused: Related to the above point, when your marketing and branding efforts lack focus, they are more apt to fail because there is no way to know what types of messages through which specific platforms will most appeal to your audience.
  • Too slippery: Even it was a legitimate ideal client type, who exactly are rich people? People with net worth over $1 million? 2 million? What about people who make $1 million a year?

So to my point, the more time you spent up front developing your ideas about an ideal client type, the more productive your marketing, client acquisition and client retention efforts will be on an ongoing basis.

What I suggest to advisors who I work with is that they spend some time not only analyzing their current client base demographically, by AUM, occupation, marital status, etc., but that they also think about the clients that they are most happy to work with. That’s because the clients that your data reveals may not be your ideal client type, they just may be the types of clients that you’ve acquired over the years and who you happen to be working with right now.

This quest isn’t entirely data-driven, though data can certainly play into it. Instead, think about the names on your schedule and which people you are the most happy to see. These may be clients who are a real pleasure to work with or those whose situations and problems you feel bring out your best skills and experience or both.

That’s where to start. It’s a process well worth undertaking because when you figure it out, you can deliberately craft a marketing and client acquisition strategy to find more of these people and, before you know it, you work day may be filled with people who bring out the best in you and who you want to be with, rather than one headache after another.

It’s taken more than six years after the beginning of the last financial crisis for the US to finally implement some of the regulations that became glaringly necessary when the financial system began to implode at that time. The Volcker Rule, along with Dodd-Frank legislation, are a start towards the kind of systemic regulation the financial system here requires to keep it in line.

Unfortunately, the regulations are too limited in scope to keep problems in the U.S. from reaching crisis proportions, let alone spreading overseas. As Gordon Brown points out in an Op-Ed in the New York Times, the lack of regulations to restrain global financial corporations operating overseas and markets in the developed and developing world all but ensures that we will visit Global Financial Crisis 2.0.

I wrote about this more than four years ago for the New York Society of Security Analysts in a piece entitled Mending the Seams: International Regulatory Reform. In the intervening years, a few things have changed, but not much. On a global basis, rules governing everything from systemic risk to derivatives to accounting standards to hedge funds vary widely as does enforcement of those rules.

Even if the rules were consistent, financial services companies can escape regulation by moving certain operations to different jurisdictions. There’s still the propensity of the right hand to have no clue what the left hand is doing, as alleged “rouge” traders engage in mind bogglingly risky behavior.

What is the scariest is the risks that we don’t even know about. The last crisis proved that the lack of foresight into risky activities was endemic, from the ones that seemed, in hindsight to be the most obvious, to other obscure risks that few even comprehended were risky.

If Bank of England economist David Miles is right, the next financial crisis will happen sooner than we think. He predicts one every seven years. It could happen, or not. The system could stumble along for another few years, fueled by loose money and a return to economic growth.

While the developed world and the global economy may be growing at a higher rate, one thing that hasn’t really changed is the lack of global stability. And that’s what’s going to come back to haunt us.

If you’re evaluating your financial advisor based on how your investments have performed during the past year, I have a thought for you. Stop right now.

Don’t! One year’s performance does not a track record make. Of course, it’s a good idea, as today’s Wall Street Journal suggests, to make sure that whatever benchmark you’re using is appropriate. Using a stock benchmark such as the S&P 500 to evaluate the performance of a portfolio that is likely diversified by asset type is a bad idea in the first place.

But the major mistake lies in examining one year’s performance in isolation. When I was a mutual fund columnist for Better Investing Magazine, I advised my readers to go at least five years, if not 10, when evaluating the performance of a mutual fund manager. Admittedly, it’s not as easy to benchmark your advisor’s performance as it is a mutual fund, but it’s certainly possible.

As the Journal suggests, look at a blended index and consider whether the performance of your investments is on track to meet your goals as you’ve constructed them with your advisor’s help. Of course, if the performance of your portfolio consistently lags a blended index and isn’t on track to meet your goals and you don’t feel confident in your advisor, it’s certainly a good idea to have a conversation or series of conversations and even look at other alternatives. That’s just common sense.

Here’s another issue — if you rely on your advisor for more than just investment management, judging his or her value solely based on investment management is another mistake. An advisor worthy of the name will offer many other services to help you manage the full gamut of your financial life, from financial planning to budgeting to retirement planning plus referrals to trusted sources for insurance and estate planning.

Judge the relationship on all of it’s merits and keep the lines of communication open. That’s the best way to evaluate performance on an ongoing basis.

Payday loans invade the workplace

Posted: December 16, 2013 in Uncategorized

Symbolizing two ugly trends in employment and finance, payday loans have invaded the workplace. In an article in today’s Wall Street Journal, Workplace Loans Gain in Popularity, the paper notes that more employers are offering “short-term” loans as a alleged benefit to their employees.

Such benefits carry fees that add up to an annual percentage rate of 100 to 165 percent. That’s a benefit? Give me a break. Usury is more like it.

To add insult to injury, employers who make these these loans available are also, apparently without any irony, offering online personal financial and budgeting tools to help employees. Really?

By calling these payday loans benefits and wrapping them in the mantle of education, employers are doing their employees a grave disservice. They are setting them up to be trapped in a cycle of payday loan hell, instead of doing the right thing, which is to pay them enough so that they don’t have so much trouble making ends meet.

American employers have benefitted greatly from increased productivity and higher profit margins during the past few years. Much of these gains have been at the expense of their workforce, which is losing ground, as wage growth is actually lower than inflation.

For those on the lower end of the employment spectrum, where most of the employees are whose employers are offering these payday loans, there isn’t much hope. When employers add payday loans to their slate of “benefits”, mount food drives for employees and encourage them to apply for public assistance, it’s pretty bad.

One bright spot for employees are the efforts of groups of employees of low-wage employers, such as fast food employees, who are organizing and holding one-day strikes around the country. One example is Fight for 15, a group of Chicago fast food and retail employees, who are fighting for a livable minimum wage of $15 an hour. I applaud their efforts and the efforts of others who are campaigning for wages that will allow people to not only pay their bills, but save for retirement and meet the other hopes embodied in the American Dream, which has become more out of reach for millions the longer the alleged economic recovery goes on.

Indexing run amok

Posted: December 11, 2013 in Uncategorized

Ask John Bogle, founder of the first index fund, what he thinks of the state of indexing today, and he doesn’t mince words — most of the products out there, specifically ETFs, “are not worth the powder to blow them to hell,” according to this article in Financial Planning magazine.

That’s because most ETFs, and many index mutual funds, are so narrowly premised on tiny market niches, that they aren’t index funds in the truest sense of the word, in the spirit of Bogle-inspired index investing. When he created the Vanguard 500 Index Fund in 1975, it was based on the idea that investing in a broad cross section of the market at a low cost would provide investors with returns that would keep pace with the overall market with the potential to out perform the vast majority of actively  managed funds.

In the subsequent decades, hundreds of billions of dollars in assets under management have poured into index funds, which have become the preferred alternative for millions of retail and institutional investors.

I couldn’t agree more with Bogle’s thesis that these new ETFs, which make an overt or covert claim as index type products, are perverting the thesis behind index investing and have the potential to be extremely damaging to the portfolios of individual investors. Investors who are attracted to and invest in these funds likely have very little or no understanding of what they are investing in and even in “normal” market conditions, let alone a financial crisis, could find their portfolios sustaining major losses.

So what’s the answer? As always, buyer beware. There is no shortcut to wealth in the markets. Speculative products, especially those that seem to combine the familiar (indexing) with the exotic (alternative investing) are more likely to provide the opportunity to get poor quickly, rather than the sought after alternative.

I’m not quite ready to throw a party about the unemployment rate dropping to 7 percent because there’s still too much evidence that the decline is driven less by genuinely robust job creation than by more of the long-term unemployed becoming so discouraged that they are dropping out of the employment market altogether. In addition, we’ve experienced such “false dawns” of higher employment and increased growth during the past several years, only to fall back into the overall anemic growth pace that has been characteristic of this recovery.

That being said, the New York Times posted some interesting stats in the Economix blog about the trajectory of employment recovery from financial crises through history, and there’s decent food for thought there. The fact is, recovery from the devastating job losses of the Great Recession is actually ahead of where we might be compared to other historical financial crises.

So, it could be worse — after the Great Depression, it took 10 years for employment to fully recover. Japan employment has yet to recovery from the deflationary spiral that began in 1992. Sweden, Norway, Finland and Spain experienced between 8.5 and 17 years of lagging employment following crises in the 70s, 80s, and 90s.

That’s the good news. The bad news is that millions will continue to suffer as the recovery plods through the decade. Many older and younger workers will likely never make up the wages and lost opportunities that the recession took from them. While female employment has rebounded, employment among men is still lagging, according to CNNMoney.

Finally, on a sobering note, the Brookings Institute estimates that it will take seven more years at the present average rate of job creation to make up for all the jobs lost during the recession. So, if you’re out of a job or underemployed, take heart, because you may be back where you were by 2020.

The successful attempts of big banks to manipulate LIBOR, a key interest rate benchmark, are in the headlines again as the European Union became the latest entity to fine miscreants in this sordid tale. This Wall Street Journal graphic provides a solid overview of allegations and files in this ongoing tale.

At this point, the facts are pretty well known and they aren’t the subject of my post. What I’m more interested in considering is will the fines and headlines make any difference to potential future scams around interest rates and with other financial instruments? And what does it say about our financial system that such headlines have become almost routine, not really prompting much outrage?

You can probably see where I’m going. First of all, I don’t think the fines are going to make any difference in terms of deterring future bad behavior. For the largest financial institutions, it seems to me that these fines have just become another cost of doing business. After all, it’s just money and they make plenty of it. And it’s easy enough for top brass to blame rouge employees, traders or whomever rather than take responsibility for the imbedded cultural attitudes that make this type of behavior the norm in just another day at the office. Their reputations aren’t great anyway, and it’s just another black mark that will be quickly forgotten as the news cycle moves on to the next Miley Cyrus video.

Secondly, I see this behavior as more typical than not of our financial system. As the most recent financial crisis showed, governments are willing to do just about everything and anything to keep the financial system up and running, even when it is demonstrably corrupt. Tough regulations, even when they are actually proposed, end up either being watered down so much that they don’t mean much or enforced with so little vigor that they might as well not be on the books. Financial institutions have been fined for so much bad behavior at this point, everything from this scandal to illegal foreclosures and so forth, that it just doesn’t mean anything.

Onto the next scandal…

As a person of the liberal persuasion, I never needed much convincing that health care reform was a good idea. As someone who is single and self-employed, it’s been an even easier sell, especially as I’ve seen my individual premiums go up significantly during the past several years, to the point where I am currently paying $622.80 a month for a high deductible plan that doesn’t seem to cover much of anything.

I know that’s the point of high deductible plans, that they have…well…high deductibles. But I never got much benefit of the trade-off, which is supposed to be lower premiums. That’s because as a self-employed person on the individual market with a pre-existing condition, I had only option when it came to health insurance. That was to convert my post-divorce COBRA insurance into an individual policy, which I did a little more than two years ago, after my three years of COBRA expired.

So I wasn’t particularly upset when I received a notice from Highmark Blue Cross/Blue Shield a couple of months ago that my insurance policy was going to be cancelled. I was hopeful that I could find something better for at least the same price, if not less, through the Health Insurance Marketplace created by health care reform. As a resident of Pennsylvania, which does not have its own exchange, I was going to go into the federal exchange.

So, shortly after Oct. 1, I went to healthcare.gov and like so many others, couldn’t create an account. I was able to look at some policies and was encouraged to see that my costs were likely to fall. Like so many, I followed the saga in the news about the snafus with the site, which have been significant. Because of those issues, I didn’t try again until this week to access the site and create an account.

Over the course of several hours over several days, I was able to create an account and compare plans. I ultimately chose a gold plan that reduces my costs by $187.95 per month and gives me better benefits than what I had before, including:

  • Co-pays for doctor’s visits and prescriptions, which I have to pay for out of pocket now until my deductible is met
  • Co-pays for tests and emergency room visits, which I also now have to meet my deductible before getting any coverage
  • Lower out of pocket maximum

Although my overall deductible is higher — $1,500 vs $1,000, the co-pays really mitigate that because I am a healthy person who typically doesn’t consume a lot of care. I’m also getting dental coverage, which I haven’t had since my divorce; to be fair, I haven’t looked into it, but one major benefit of healthcare.gov is that it is easy to find, compare and buy insurance.

My experience may not be typical. I make too much money to qualify for subsidies, which simplifies the process. But, as one of the millions of Americans for whom health care reform was set up, I’d have to say it’s a success. From my POV, it’s been worth the few hassles and although the site shouldn’t have been so buggy in the first place, it’s working as advertised for me and thousands of others.

I really disagree first of all with those who believe healthcare reform wasn’t necessary and secondly, with those who believe the bungled set up of the site completely undercuts not only healthcare reform but the Obama administration. Nonsense — of course, it should have been handled better. But it’s working and the fixes will continue to help it function more smoothly and over the next months and years it will fulfill its promise, which is to extend health care choice to millions of Americans. Count me in.

As the global financial crisis unfolded, the enmeshment of a wide variety of financial services firms with each other was a major factor in it’s ultimate impact on the economy. From brokerage firms to mortgage brokers to asset management companies, it seemed like everyone had a role to play in magnifying the scope of the crisis.

Risk spread like the proverbial stone thrown into a pond, touching businesses, consumers and governments in virtually all corners of the globe. That’s why it seems to make sense to me that government regulators — in this case the Financial Stability Oversight Council — are examining all types of systemic risk and focusing on asset management firms, now that it has worked its way through banks and related firms such as American International Group and GE Capital.

Needless to say, asset management firms disagree, the Wall Street Journal reports. These firms, including Fidelity, PIMCO, and others are lobbying members of Congress and the Department of the Treasury in an effort to discredit a report from the Office of Financial Research (the research arm of the Financial Stability Oversight Council) that identified asset management firms as a potential systemic risk factor that should be targeted for stricter regulation.

As one of the millions of US taxpayers who ended up financing the bailout from the aforementioned financial crisis and who is a participant in an economy that is still limping along due to the after effects of it, I’m a firm believer in quantifying and constraining systemic risk where possible. In this juicy report, the Office of Financial Research makes a very credible case for extending the mantle of systemic risk regulation to at least some of the largest asset management firms.

Here are some of the issues they outline that could imperil the financial system, creating the need for some type of systemic risk regulation:

  • Reaching for yield: the tendency of asset managers to seek higher returns through riskier assets
  • Herding: the tendency of asset managers to crowd into popular asset classes
  • Competitive pressures that incentivize managers to take risks to improve performance
  • Redemption risk in volatile markets that may result in heavy redemptions by investors in falling markets
  • Increasing use of leverage and derivatives that may impact funds in unexpected ways during a market crisis
  • Potential failure of asset management firms
  • Concentration of risks or risky activities within a asset manager or even a specific fund
  • Interconnectedness and complexity of risks in firms’  business activities, products and services

I’m sold, but that’s not the end of the story. The report points out that asset management firms can transmit risks across the entire global financial system via exposure of creditors, counter parties, investors and market participants to an asset manager or activities of an asset manager. In addition, these risks and activities have the potential to cause disruptions via fire sales when asset prices are in a free fall.

None of this should be shocking to anyone who was paying attention to the last financial crisis. It seems like common sense to me that the largest firms that engage in these kinds of activities should be subject to additional regulation and supervision due to their potential risks to global financial stability.

I, for one, certainly don’t want to wait to find out what elevated risks asset management firms pose by waiting until the next financial crisis. I’d rather see them contained and evaluated today.