The Investment Gods Are Furious

Market Cycle Investment Management (MCIM) is an historically new methodology, but with roots deeply embedded in both the building blocks of capitalism, and financial psychology— if there is such a thing.

The earliest forms of capitalism sprung from ancient mercantilism, which involved the production of goods and their distribution to people or countries mostly around the Mediterranean.

The sole purpose of the exercise was profit and the most successful traders quickly produced more profits than they needed for their own consumption. The excess cash needed a home, and a wide variety of early entrepreneurial types were quick to propose ventures for the rudimentary rich to consider.

There were no income taxes, and governments actually supported commercial activities, recognizing how good it was for “Main Street” — as if there was such a thing.

The investment gods saw this developing enterprise and thought it good. They suggested to the early merchants, and governments that they could “spread the wealth around” by: selling ownership interests in their growing enterprises, and by borrowing money to finance expansion and new ventures.

A financial industry grew up around the early entrepreneurs, providing insurances, brokerage, and other banking services. Economic growth created the need for a trained workforce, and companies competed for the most skilled. Eventually, even the employees could afford (even demand) a piece of the action.

Was this the beginning of modern liberalism? Not! The investment gods had created the building blocks of capitalism: stocks and bonds, profits and income. Stock owners participated in the success of growing enterprises; bondholders received interest for the use of their money; more and better skilled workers were needed — the K.I.S.S. principle was born.

As capitalism took hold, entrepreneurs flourished, ingenuity and creativity were rewarded, jobs were created, civilizations blossomed, and living standards improved throughout the world. Global markets evolved that allowed investors anywhere to provide capital to industrial users everywhere, and to trade their ownership interests electronically.

But on the dark side, without even knowing it, Main Street self-directors participated in a thunderous explosion of new financial products and quasi-legal derivatives that so confused the investment gods that they had to holler “’nuff”! Where are our sacred stocks and bonds? Financial chaos ensued.

The Working Capital Model was developed in the 1970s, as the guts of an investment management approach that embraced the cyclical vagaries of markets. This at a time when there were no IRA or 401(k) plans, no index or sector funds, no CDOs or credit swaps, and very few risky products for investors to untangle.

Those who invested then: obtained investment ideas from people who knew stocks and bonds, had pensions protected by risk-averse trustees, and appreciated the power of compound interest. Insurance and annuities were fixed, financial institutions were separated to avoid conflicts of interest, and there were as many economics majors as lawyers in Washington.

MCIM was revolutionary then in its break from the ancient buy-and-hold, in its staunch insistence on Quality, Diversification, and Income selection principles, and in its cost based allocation and diversification disciplines. It is revolutionary still as it butts heads with a Wall Street that has gone MPT mad with product creation, value obfuscation, and short-term performance evaluation.

Investing is a long-term process that involves goal setting and portfolio building. It demands patience, and an understanding of the cycles that create and confuse its landscape. MCIM thrives upon the nature of markets while Wall Street ignores it. Working Capital numbers are used for short-term controls and directional guidance; peak-to-peak analysis keeps performance expectations in perspective.

In the early 70s, investment professionals compared their equity performance cyclically with the S & P 500 from one significant market peak to the next — from the 1,500 achieved in November 1999 to the 1,527 of November 2007, for example. Equity portfolio managers would be expected to do at least as well over the same time period, after all expenses.

Another popular hoop for investment managers of that era to jump through was Peak to Trough performance —managers would be expected to do less poorly than the averages during corrections.

Professional income portfolio managers were expected to produce secure and increasing streams of spendable income, regardless. Compounded earnings and/or secure cash flow were all that was required. Apples were not compared with oranges.

Today’s obsession with short-term blinks of the investment eye is Wall Street’s attempt to take the market cycle out of the performance picture. Similarly, total return hocus-pocus places artificial significance on bond market values while it obscures the importance of the income produced.

MCIM users and practitioners will have none of it; the investment gods are furious.

Market Cycle Investment Management embraces the fundamental building blocks of capitalism — individual stocks and bonds and managed income CEFs in which the actual holdings are clearly visible. Profits and income rule.

Think about it, in an MCIM world, there would be no CDOs or multi-level mortgage mystery meat; no hedge funds, naked short sellers, or managed options programs; no mark-to-market lunacy, Bernie Madoffs, or taxes on investment income.

In MCIM portfolios, lower stock prices are seen as a cyclical fact of life, an opportunity to add to positions at lower prices. There is no panic selling in high quality holdings, and no flight to 1% Treasuries from 6% tax free Munis. In an MCIM portfolio, dividends and income keep rolling, providing income for retirees, college kids, and golf trips — regardless of what the security market values are doing.

Capitalism is not broken; it’s just been overly tinkered with. The financial system is in serious trouble, however, and needs to get back to its roots and to those building blocks that the Wizards have cloaked in obscurity.

Let’s stick with stocks and bonds; lets focus on income where the purpose is income; let’s analyze performance relative to cycles as opposed to phases of the moon; let’s tax consumption instead of income; and let’s not disrespect the gods, the “Bing”, or the intelligence of the average investor…

So sayeth the gods. Amen!

Protect yourself from Identity Thieves!

Andrea told her husband Jack that she had noticed a young person going through their condo paper-recycling bins. At first, she thought they were just looking for recyclables which could be turned into cash, but later realized the person was rummaging through all of the containers that were paper-products only.

These bins often contain bank statements, cancelled cheques, private letters, other important documents, credit card statements and envelopes. If the information is from a business office, old client files and related data can often be found. There have been stories in the news about scavengers going through people’s waste and recyclables specifically looking for these items. The information that can be obtained is very valuable to information thieves and can be potentially damaging to you.

Credit Card Statements – Just how valuable is your credit card number to a thief? One couple was vacationing in Montreal when their credit card information got into the hands of an organized crime group in Mexico. Overnight their card had been maxed out. How would you like your next vacation to start this way?

Bank Statements – With an old bank statement, a cancelled cheque and a little bit of today’s technology, anyone can easily print up cheques drawn on your account and forge your signature. You can imagine the havoc this can create.

Envelopes and Magazines – Check your name and address on the magazines to which you subscribe and the notices you receive and you will often find your account or membership number is displayed. With that number, anyone can gain access to your member or account information and re-direct your mail. In some cases, this can be done on the Internet. If someone can re-direct your mail, would you wonder what else they might be able to accomplish?

Office Waste – The information that can be found in discarded office material is very valuable. It can contain confidential information on your customers, correspondence from companies with which you deal, statements of account, customers’ account data, quotations, billing information, purchase orders, etc. Would you like a competitor to get their hands on any of this information? What about your customer’s own identities – could they be stolen from information you discard?

Andrea and Jack decided to foil the information thieves by buying a personal paper shredder for less than $100. They now shred all papers containing anything other than their names and addresses. Though a determined thief might piece the shredder’s output back together, stirring it up should make this practically impossible.

The Canadian Anti-Fraud Centre (www.antifraudcentre.ca) is an excellent resource regarding all types of fraud including Identity Theft. Here are some quick tips from their website.
1. Before you reveal any personally identifying information, find out how it will be used and if it will be shared, and with whom.
2. Pay attention to your billing cycles. Follow up with creditors if your bills don’t arrive on time.
3. Use passwords on your credit cards, bank and phone accounts. Avoid using easily available information like your mother’s maiden name, your birth date, the last four digits of your SIN or your phone number.
4. Minimize the identification information and number of cards you carry in your wallet or purse.
5. Do not give out personal information on the phone, through the mail or over the internet unless you have initiated the contact or know with whom you are dealing.
6. Keep items with personal information in a safe place. An identity thief will pick through your garbage or recycling bins. Be sure to shred receipts, copies of credit applications, insurance forms, Physicians’ statements and credit offers you get in the mail.
7. Give your SIN only when absolutely necessary. Ask to use other types of identity proof when possible.
8. Don’t carry your SIN card; leave it in a secure place.

In my next post, I will share some thoughts on other types of fraud and identity theft – including the internet, your telephone and RFID scanners!

The Banks Will Take You Part Way

For many small businesses, especially young ones, bank financing is a key part of the financial structure.  It will pay you to understand how it works, what limits there may be, and what you can do to make it work better for you.

First of all, you need to notice that banks are not risk takers.  Their view of the world is that you, the borrower, should be taking more risk than they are taking.  Many novice business owners think that banks are there to supply their financial needs.  They are not.  They will help to the extent that it does not put them at risk.

Failing to understand this point is harmful for immature businesses.  It is easy to become over-committed and the bank will not pick up 100% of the resulting tab.  Maybe two thirds if you are lucky.

Many years ago, I had a client who was making money hand over fist.  They were expanding their territory, buying machinery, hiring people and best of all selling their product at previously unheard of  levels.  Much of what they sold was leased to their customers.  They had deals with three financial institutions who purchased the leases as they were created.  Usually within 30 days of the delivery.  They also had a line of credit with a Big 5 bank to deal with fluctuations.

What happens when the lease buying institutions slow their purchases while you are ramping up sales and production?  Very bad things happen.  Within a period of about 10 weeks, they went from solvent and growing to insolvent and liquidating.  Price adjusted, in the last 6 months of business they earned in excess of $1,000,000.  They still went broke because they could not handle the cash flow.

Their bank line of credit would have needed to grow to six times what was authorized and they would have needed to cut back their growth.  You cannot do either of those things in a short period.

When you are growing be very cash aware.  It is possible that your worst enemy is an all-star salesperson.  Growth, even profitable growth, is not necessarily a good thing.  It must fit into your cash timetable.  A profitable sale that turns into cash 30 days from now is not going to meet this weeks payroll or pay the suppliers.

Rapid growth hurting new businesses happens more than people realize.  It is not restricted to new businesses, but with older ones the problems are more complex.  The “Where’s the Beef” series of ads were very good for Wendy’s sales, but founder Dave Thomas later noted that they very nearly put them out of business.  Cash was not the problem but logistics was.  To sell more hamburgers, you need to buy the meat, the bun, and the condiments in the right numbers.  You need more fries and more soft drinks and more staff and maybe even more equipment and parking and even restaurants.

None of those things appear without planning and action well in advance of the need.

Like the logistics, banks will participate in growth to a reasonable share of the price, but they will not normally participate after it happens and especially when it does so in a chaotic way.  To expect them to do so is acting contrary to human history

Business is about balance.  Uncontrolled growth, while nice in some ways, is usually harmful.  When you are growing quickly it pays to step back and project where it is leading you.  Talk to accountants and bankers before you need the cash or the logistical changes.  Consider your depth of management.  Be proactive and be very fussy about what sales you accept.

The one true indicator that trouble is just around the corner is this. You are spending more of your time collecting receivables, deferring payables, borrowing from friends and relatives, taking nothing for your own needs and complaining about the banks.  Cash flow failures are first seen as time pressures.  That is time you should have been using to operate the business efficiently.  A double loss.

Don’t be impatient.  Controlled growth wins.  Sometimes turning sales away is a good decision.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

How to Tell the Difference Between Investing and Gambling!

gamblingI saw a question posted on a popular social network. The question was: ‘What is the difference between gambling and investing?” I’m inspired to reproduce (edited with permission) the following excerpt from A Maverick Investor’s Guidebook (Insomniac Press, 2011) which I believe provides as good an answer as one might find.

How to Tell the Difference Between Investing and Gambling!

“How do you develop ‘smart thinking’ and when do you know you’ve got ‘avarice’?”

My instinctive response would be: “You always know when you’re being greedy. You just want someone else to say that your greed is okay.” Well, I’ll say it then: greed is okay. The proviso is that you fully understand when greed is motivating your decision and live with the consequences. Avarice is driven by desire, which is not a trait of an investor.

Remember, it’s best if investment decisions are rational and stripped of emotion. Greed is associated with elation on the one hand, and anger (usually directed at oneself) on the other hand.

When decisions are motivated by greed, I call it gambling. In my mind, there are different sorts of gamblers. Some gamblers place modest bets, and if they win, they move along to another game. For me this might be roulette. There are those who enjoy playing one game they’re good at, such as blackjack or craps, hoping for a big score. Finally, there are those who are addicts. I can’t help those folks, so let’s assume we’re just discussing the first two types.

It’s okay to do a bit of gambling with a modest part of your disposable income. In fact, investors can apply some of what they know and have fun too. Unlike the casinos, financial markets have no limits or games stacked in favour of the house. It’s the Wild West, and if an investor understands herd behaviour and the merits of contrarian thinking, and does some research, the results can be quite lucrative. Whether using stocks, bonds, options, hedge funds, domestic mutual funds, foreign equity or debt funds, or commodity exchange-traded funds (if you don’t know what these things are and want to know, buy a book that introduces investment theory and the various types of securities), applying investment principles will help you be more successful.

gamblerTo put it plainly: counting cards may not be allowed in a casino, but anything goes when it comes to markets. Just don’t forget that most of the financial industry is trying to make your money their money. There’s a reason why a cowboy sleeps with his boots on and his gun within reach.

The fine line between gambling and investing is hard even for old cowhands to pinpoint. Investing also involves bets, but the bets are calculated. Every decision an investor makes involves a calculated bet—whether it’s to be in the market or not at all, biasing a portfolio in favour of stocks versus bonds, skewing stock selection in favour of one or several industry groups, or picking individual stocks or other types of securities.

I met a lady once in line at a convenience store. She bought a handful of lottery tickets, and I asked her, “Aren’t the odds of winning pretty remote for those lotteries?” Her reply was, “The odds are good. There’s a fifty/fifty chance of me winning.” Confused, I asked, “How do you figure?” I laughed aloud when she said, “Either I win or I lose; that’s fifty/fifty, isn’t it?”

A maverick investor knows there’s always a probability that any decision to buy or sell or hold can prove to be incorrect. The objective is to minimize that probability as much as is feasible. It’s impossible to make it zero. This is why financial firms have sold so many “guaranteed” funds lately. People love the idea, however impossible, of being allowed to gamble with no chance of losing. Whenever there’s a promise that you won’t lose or some other similar guarantee, my senses fire up a warning flare.

There’s usually a promise of significant upside potential and a guarantee that at worst you’ll get all (or a portion) of your original investment back. Many investors a few years ago bought so-called guaranteed funds only to find that the best they ever did receive was the guaranteed amount (extremely disappointing) or much less after the fees were paid to the company offering the product. If you think this stuff is new, trust me, it’s not.

guaranteedA fancy formula-based strategy back in the ‘80s called “portfolio insurance” was popular for a brief period. An estimated $60 billion of institutional money was invested in this form of “dynamic hedging.” It isn’t important to know in detail how the math works. Basically, if a particular asset class (stocks, bonds, or short-term securities) goes up, then you could “afford” to take more risk because you are richer on paper anyway, so the program would then buy more of a good thing. If this better-performing asset class suddenly stopped performing, you simply sold it quickly to lock in your profits. The problem was that all these programs wanted to sell stocks on the same day, and when everyone decides they want to sell and there are no buyers, you get a stalemate.

The “insurance” might have worked if you actually could sell the securities just because you wanted to, but if you can’t sell, you suffer along with everyone else—the notional guarantee isn’t worth the paper it’s printed on. Remember these are markets, and even though you see a price in the newspaper or your computer screen for a stock, there’s no trade unless someone will step up to buy stock from you. The market crash that began on Black Monday— October 19, 1987—was, in my opinion, fuelled by portfolio insurance programs. The market was going down, so the programs began selling stocks all at once. There weren’t nearly enough buyers to trade with. By the end of October ’87, stock markets in Hong Kong had fallen 45.5%, and others had fallen as follows: Australia 41.8%, Spain 31%, the U.K. 26.4%, the U.S. 22.7%, and Canada 22.5%.

Minimizing the Probability of Stupidity

If you’re gambling, follow the same steps you would as if you were investing. If it’s a particular stock you are anxious to own, do some homework, or at least look at someone else’s research available through your broker or on the Internet. When I was a younger portfolio manager, there were limited means to learn about a company. I would have to call the company and ask for a hardcopy annual report to be sent to me. When it arrived after several days, I’d study it a bit so I didn’t sound too ignorant, then I’d call and try to get an executive (controller, VP finance, or investor relations manager) to talk to me. If asking questions didn’t satisfy my need to know, then I’d ask to come and meet with them in the flesh. Nowadays, you have all the information you need at your fingertips.

Money.ca is a PRIME example of just one such source of valuable information available to investors today!

Mal Spooner
Mal Spooner

Credit card fees – revisted

I think it is reasonable to assume that most Canadians are now aware that the Competition Tribunal tossed a complaint about the excessive fees being charged by credit card issuers (mainly our big banks) and the impact of those fees on small business and consumers. Even more interesting is the fact that the reasons for the decision to dismiss the complaint are being withheld from the public! I wonder what the Tribunal is trying to hide? Is that “independent” Tribunal really in place to protect consumers and small businesses or rather large financial institutions?

As I commented in earlier blogs, nothing in life is free – including the use of credit and the accumulation of “rewards points” or other forms of loyalty incentives. Everything has a cost, and despite what some governments and tribunals claim to the contrary, there is only one payor of these fees and that is you and I – the ultimate consumer of everything produced in our economy.

Somehow, these large institutions (that make somewhere between 5 and 7 BILLION $ per year from Canadians paying these fees) managed to convince the Tribunal that this was in the “best interest” of Canada and Canadian consumers! It must have been very creative and ultimately persuasive and maybe that is why the Tribunal doesn’t want to release all documentation to us. Good heavens, we might even be able to draw our own conclusions that we are being ripped-off and no-one is prepared to take a stand.

I am not a fan of government intervention, but the voluntary code introduced some months back by the Federal Government, hasn’t done anything and maybe the code should become law.

It’s time to lock in your mortgage rate…ASAP!

Most of us dream of the day when we can burn our mortgage. Few of us are prepared for the day when the mortgage burns our dreams of home ownership.

For some, the added expense of renewing their mortgage at a higher rate of interest can come as a shock. The rates offered today are crazy low by historical standards. Young homeowners weren’t subjected to skyrocketing mortgage rates during the early 1980’s and God willing they never will.

I recall being asked – long ago when friends thought I was prescient just because I worked in the financial industry – whether or not one should lock in the mortgage rate for the long term since it seemed like they’d just keep going higher. After all, in 1982 the trajectory of interest rates and mortgage rates had been straight UP!

As you can imagine, my answer at the time was an emphatic “NO!”

Today the opposite is true. The cheapest posted mortgage rates are the ones with the shortest terms or are variable. Plug those rates into your calculator and the payment schedule seems like a dream come true. Unfortunately interest rates over short time horizons can be surprisingly volatile. It’s possible just one or a few years later you’re burdened with payments that are no longer manageable.

In March of 1987 the average mortgage rate was close to 10%, but by March of 1990 had climbed to 13.5%. The monthly payment for a $500,000 mortgage at 10% (crude calculations but I am lazy) might have been around $4800. But at 13.5% would be nearly $6000. If you or your partner were lucky enough to get a $15,000 raise over the course of the term (say 3-year in this example) then things would be okay, but otherwise your consumption (food, child’s education, gasoline) or savings plan would suffer. Worst case, you’d have to sell the house.

Strangely enough, housing prices can rise during the early stages of rising interest rates as people who were planning to buy a house begin to hurry up the process, hoping to get a more attractive mortgage rate (before they go any higher). Unfortunately, the panic to buy is short-lived and soon there is a veritable drought of buyers who can’t afford to hold mortgages at the higher rates. Suddenly, there’s a glut of houses for sale, and if you can’t manage the higher monthly payments you have to sell the house at a loss. OUCH!

The process of rising interest rates has already begun in earnest. Historically, mortgage yields are slightly above bond yields. Bond yields go up, mortgage rates go up too. Financial institutions have responded to rising bond yields (see graph) by raising their mortgage rates in recent months as I’m sure you’ve noticed. At present, mortgage rates haven’t risen as much though, because these institutions continue to compete with one another by offering incentives and there’s also a bit of a lag as head office communicates its changes in corporate strategy down to the marketing departments.

There is still a bit of time to buy your dream home and walk away with a low-rate mortgage, but not nearly as much time as you might think. You might be reading that governments are inclined to keep the ‘bank rate’ (or discount rate which is the rate of interest the central bank charges the commercial banks to borrow money) low, in order to help the economy along. This policy is long-in-the-tooth already, and central banks cannot continue lending money to the banking system at a ridiculously low rate, when the interest rates the central banks have to pay to raise money for government spending (bond rates) keep rising. The strain on the country’s finances will become too onerous, and unwanted inflation inevitable.

If you haven’t taken advantage of low mortgage rates yet, go ahead and lock up your rate at the lending institution for as long a term as possible. And if you’ve been holding off buying that new car, don’t wait. I’ve been in the financial industry long enough to know a good thing when I see it and I took advantage of one of those generous 0% financing offers – I figure I may not see another opportunity like it in my lifetime.

Mal Spooner

 

 

 

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Investment Industry needs independent players!

The most recent print issue of Money noted that the big Canadian banks managed to earn $31.7 billion in 2012, just a few years after there was grave concern that they’d even remain solvent.

“There is no question that Canadian banks play a vital role; locally, provincially, nationally and inter-nationally. Without the banks, our economy could simply not function efficiently or effectively. But are the banks getting too big and going too far to gain market share and profits at the expense of their own customers?” (Quote from Spring 2013 issue of Money Magazine.)

In November of last year I published a piece entitled Banks own the investment industry! A good thing? In many respects allowing the banks to provide everything from our mortgage to investment services is incredibly convenient. But at what price? It has become near impossible for many smaller investment dealers to stay in business. Fraser Mackenzie is a recent victim of an industry that requires scale in order to compete:

At their shareholder meeting on April 29th, 2013 it was decided: “Our assessment of the current business climate has led the owners to conclude that deploying our capital in the continuance of our regulated investment dealer businesses can no longer generate an acceptable rate of return. Institutional interest in early stage mining and oil & gas companies, sectors to which we have been heavily committed, has dried up: as has the associated trading in the equities of early stage resource companies. Furthermore, the regulatory cost burden is increasing at a time that industry-wide revenues are declining. On balance, it makes sense for our shareholders to re-deploy their capital.”

Indeed, well over half of the total value of trading done on the TSX in a typical month is conducted by the banks.

My guess is their actual market share of all trading is far above half if we were to also include trading platforms not part of the Toronto Stock Exchange. The banks keep growing, and the regulatory burden also grows more onerous. In my estimation, the larger financial companies relish regulation as an additional barrier to entry. Regulatory oversight is a minor inconvenience to the big banks, whereas for less diversified specialty businesses (mutual fund companies, standalone investment dealers, investment managers) the added expense can be devastating.

Obviously there are huge benefits to scale – but do consumers really benefit or are these economies of scale all kept as bank profits? MER’s for their proprietary mutual funds might appear very reasonable, but it’s impossible to determine whether or not the plethora of fees I pay for other services are subsidizing these seemingly lower expense ratios. Transparency is near impossible. Although many banks did collapse as a result of the the financial crisis, the massive rebound in the profitability of those surviving banks (even though they lost ridiculous amounts of capital doing stupid things with asset backed securities, derivatives trading etc.) suggests that those everyday fees paid by consumers and businesses must exceed the marginal cost of providing these services by quantum leaps and bounds.

Another concern I have – besides the demise of competition in the financial services industry – has to do with motivation. It’s true that every business is designed to make money, but in days of yore a mutual fund company, investment manager or stock broker had to have happy customers in order to succeed. If they didn’t help the client make money, the client would go somewhere else. I believe that as each independent firm disappears, so does choice. Making a great deal of money from you no longer requires you to be served well. What are you going do? Go to another bank?

The prime directive (to borrow an expression from Star Trek) of the financial services behemoths is profits. The financial advisor’s role is to enhance corporate profitability. Financial advisors today are increasingly handcuffed not just by regulatory compliance, but also ‘corporate’ compliance. Wouldn’t an investment specialist whose only mandate is to do well for his client be more properly motivated (and less conflicted professionally)? Would your investment objectives be better served by an independent advisor who is rewarded only because you the client are earning profits (and not because you are earning his employer more revenues)?

It isn’t necessarily true that an independent advisor is any better than one employed at a bank. I personally know of hundreds of outstanding advisors working at banks and insurance companies. But it must also be true that a satisfied, properly motivated, objective and focussed financial professional will do a better job whether he/she is at an independent or a bank.

We can’t begrudge the banks their success but left to their own devices, they’d all have merged into one by now. In December of 1998 then Canadian Finance Minister Paul Martin rejected the proposed mergers of the Royal Bank with the Bank of Montreal and CIBC with the Toronto-Dominion Bank. We know from our U.S. history that government and regulatory authorities are frequently frustrated by the political muscle (lobbyists, lawyers) of the large financial firms. Ultimately having one gigantic Canadian bank – providing all our financial services, investment needs, insurance requirements – might (or might not) be a worthy corporate ambition, but it’s hard to imagine such a monopoly being good for the likes of us. After all, just consider the progress that has been made in telecommunications since Bell Canada (or AT&T) was forced to reckon with serious competition.

The banks need independent players. Not only should banks discourage the obliteration (by bullying or by absorption) of non-bank competition, they should use their political muscle to keep the regulators from picking on Independent players. Government agencies cannot help themselves – if they are impotent against the strong they naturally attack the weak – even though when all the weak are dead the regulators would have no jobs. You don’t need a police force when there’s nobody you can effectively police.

Independent players create minimum standards of service and ethics, and fuel industry innovation. In every instance, the independent is a bank customer too. Mutual fund and investment managers pay fees to banks, buy investment banking offerings, custodial services and commercial paper and also trade through bank facilities. Independent dealers provide services and financing to corporations deemed too small to matter by larger financial companies; that is, until these businesses grow into large profitable banking customers. Put another way, why not adopt the Costco model where smaller independents can shop for stuff to sell to their own customers, and higher end specialty shops and department stores can all remain standing, rather than the take-no-prisoners approach of Walmart?

Let’s hope that the few surviving independent firms can be allowed to thrive, and if we’re lucky perhaps new players will arise to provide unique services to Canadian clients and homes for advisors who are inclined to specialize in managing and not just gathering assets.

Mal Spooner

 

 

 

 

 

Conflicting “fiduciary duty” – who is first, the client or the company selling the product or service?

Assuming this comes to pass, how do the institutions sort out the conflicts? Over the past year or so, I have been looking at a number of codes of conduct for employees and advisors within the financial services industry and they do make interesting reading.

The all have some type of statement along the lines of: “I hereby agree to conduct the affairs of XYZ Financial Institution in a manner consistent with standard operating practices and procedures and acknowledge that I have at all times, a fiduciary duty and responsibility to XYZ Financial Institution.” This is wonderful, but interestingly enough, in all of my reviews, I have NEVER once seen a statement that says that the employee also has a fiduciary duty or responsibility to the clients. This same scenario applies to advisors who have to sign codes of conduct or similar statements acknowledging that they will treat the companies they represent fairly, etc.

The conundrum therefore is – which fiduciary duty has supremacy? The duty to the financial institution or the duty to the client? Consider the following two examples.

So far, none of the work from the Canadian Securities Administrators has examined these issues and nor, does it appear, that the rest of the financial services industry has considered them either. IMHO, this needs to be very carefully examined by all constituents. I believe, speaking personally of course, that the priority must be with the interests of the client. Any comments??

Fiduciary duty – a long time overdue

As most Canadian readers will know, the concept of mandating that certain advisors have a legally binding fiduciary duty to their clients has been gaining strength recently. Long overdue in my opinion!

Ignoring fancy legal words, a fiduciary duty or responsibility is to put the interests of the client FIRST, before the interests of the advisor. While for professional advisors this should be self-evident (and has always been part of my personal standard of integrity), regulators seem to feel the need to add more regulatory teeth to this issue.

So far, the impetus in Canada has come from the CSA (no – not the Canadian Standards Organisation – The Canadian Securities Administrators) which is a policy group consisting of the top Securities Regulators in each Province and Territory – and yes this includes Québec. They provide policy direction to Provincial Regulators and try and make the rules consistent across the country. There is a parallel insurance industry group called the CCIR (the Canadian Council of Insurance Regulators) which functions in the same manner as the CSA for the life and general insurance industries. I am going to presume that the folks on the CCIR are paying close attention to the work of their colleagues on the CSA and we can expect further action on the insurance side of the Canadian money world soon. Good stuff! HOWEVER, there is a problem from my perspective – what about the rest of the financial community??

What about banks, trust companies, credit unions, caisse populaires? How about household financing companies, mortgage lenders and brokers and payday lenders? What about vehicle dealers and their financing arms? Have people considered the furniture and appliance dealers and their lending practices? Even issuers of credit cards should be subject to this duty – some could argue they are the biggest offenders of not putting the interest of the client or customer ahead of their own! What about MLM businesses that require an “investment” by new “distributors” before they can play the game? Who is considering this issue beyond just the “investment” industry?

How do we, as a society, deal with those unscrupulous folks such as Earl Jones who was never registered or licensed in the first place? It wouldn’t matter what rules were in place via IIROC, the MFDA or the equivalent bodies in Québec for the Mr. Jones’ of this world. How will this impact Ponzi-schemes and the perpetrators behind them?

My next blog will examine some of the costs that will have to be paid – by guess who?? The consuming public is the ONLY source of $$ to pay for regulation and they need to be fully informed of this aspect as well!

Confetti season begins for 2013!

We start the New Year with the annual return of confetti season! You don’t know about it? Amazing!

Every year at this time, we begin the 3 month process of receiving pieces of paper called T-slips – I call them confetti. They come in white, beige, pink, blue, yellow and green. Some have stripes of other colours on them as well. Our Federal Government is one of the largest creators of this annual phenomenon. Charities are another group that create lots of these things and they add myriad colours to the collection.

Slightly tongue-in-cheek of course, however, our entire taxation system revolves around this annual festive period. Usually by the end of January the storm is well underway and continues usually until the end of March with some of the more tardy issuers dragging things out into April – regardless of the fact that most people file early to claim a refund and are now forced to file adjustments and/or send letters pleading for grace to our friends at the CRA.

As someone who prepares a couple of hundred returns of various types each year, I see this first hand and I get phone calls and emails from clients when slips appear late, or even worse after they get a Notice of Assessment that says they hadn’t reported all of their income on T-slips and CRA is applying penalties and interest.

I recommend that most clients wait until at least the 3rd week of March before even thinking about submitting their returns. There are regulatory deadlines established for all companies (and Governments) that issue T-slips are supposed to meet, but this very rarely happens because there are no significant consequences when these deadlines are missed – all to the detriment of taxpayors.

Losing, misplacing or never receiving all of the T-slips happen with great regularity yet even delays not caused by the taxpayor can result in CRA assessing penalties and interest for “failure to report” – and the client is then blacklisted (unofficially of course) for several years by CRA resulting in more audits and wasted time even when the error is caused by the Government failing to issue some slips on time or they have been sent to out-dated addresses.

So what can you do? Here are some pointers to make this easier for everyone:
a) notify Service Canada (by phone) of your correct address – this will catch everything issued by the Government.
b) notify every financial institution, by phone, email or fax of your account numbers and your current correct mailing address.
c) notify all charities to which you have contributed of your correct postal address.
d) notify all of your financial advisors of your correct postal address.
e) if you moved within the past 12 months, contact your local office of Canada Post and place an address forwarding notice on your old address – this should be in effect for at least 12 months to protect you!
f) immediately get a large brown envelope or 3-sided-closed file folder, label it T-SLIPS 2012 and keep it next to where you sort your daily mail. Each time a slip arrives, put it in the envelope or folder right away after noting the issuer, the amount and account number on the outside of the folder or envelope.
g) in the middle of March, compare your list with all of your annual account statements, bank records and your 2011 Tax Return, to see that you have everything and if a slip is missing, phone that issuer immediately!

These tips won’t guarantee everything arrives as it should, but it will reduce panic and errors! Cheers