Over the past ten years, I've had intimate exposure to the world of Financial Advisors. They have ranged from exceptionally good to criminally negligent with the distribution skewed towards the latter. And the reason for this skew is quite simple - incentives! While the CFA Institute - based here in Charlottesville Virginia - makes it exceedingly clear in their Standard I-B that integrity must be a core value of their certified professionals, they go to great lengths to discuss the sliding scale of corruption endemic within the profession. After laying out their apology for the massive number of conflicts of interest, graft, corruption and related problems rampant within the Financial Services industry, they explicitly state that:
"No specific checklist of right and wrong is written into this Standard, but the mere appearance of conflict is a real issue in today's environment and one must be sensitive to perception."
In other words, after clearly identifying the problems associated with "temptation" (their term) and seduction, they go on to say that a professional should be "sensitive to perception." But here's a problem. What if the person relying on the advice is not sensitive to the things they should be sensitive to to even form a perception? What if the client has insufficient knowledge of a product, prospective return, or risk to formulate an opinion?
In my experience from the Private Banks of UBS and Citibank to the private wealth managers that dot premium office parks in cities with adequate golf infrastructure across the country, I can count on one hand the number of CFAs I've met who can really explain what an ISDA determination is, what role ERISA played in credit rating inflation, and asset class correlation and clash risk. In preparing for becoming an investment advisor and neglecting the actual experience of sovereign, municipal and corporate defaults over the past two decades (including unprecedented intervention in interest rate manipulations), CFAs are still taught to use concepts like "Real Risk-Free Rates", "Expected Inflation", and Liquidity and Default-Risk Premiums. None of these have been useful in managing the non-recovery recovery in the markets since 2008 yet they are still used. I've yet to meet a single Financial Advisor who can tell me what the compound risk is when a large cap equity manages its profitability by tax evasion (the official term is revenue shifting and base erosion but who cares?), borrows to pay dividends, and has massive exposure to multiple currency risks. These real world variables don't show up in the hypothetical case examples in the CFA exam and they don't show up in conversations with clients about where their money is being invested. And this is outright Negligence. When you combine this negligence with graft and corruption, you get the distribution of the population I referenced above.
According to Morningstar 377 out of 1,884 U.S. bond funds hold Puerto Rican bonds - you know the ones that are going bust!. Does your Financial Advisor include this in his or her "risk-free" portfolio? These are the "conservative" or "safe" assets that can be wiped out entirely because reality wasn't factored into the perception of "risk-free".
Which brings me to the real point of this post. The citizens of Greece - for those of you historian buffs out there, the Hellenic bastion which gave rise to the current form of democracy - just voted to reject the EU imposition of austerity standards. And, try as I might, I was trying to figure out what "austerity" actually meant. Like my criticism above and having read the ridiculous Greek referendum question, I wondered what the heck the proposals from the European Commission, the European Central Bank and the International Monetary Fund in the Eurogroup of 25.06.2015 were. So, I read them. And tragically, since Greek citizens in the majority like Financial Advisor clients in the majority don't read what they're really being asked to consider, they make decisions based on perception rather than on fact. A "No" vote meant that Greeks reject the principal of "social and financial fairness across society", aligning public finances to "support growth and jobs", and "reform pensions" so that they are actually managed to invest in ways that actually provide a return rather than the system that is run by financial advisors who have not been able to invest with positive performance in the last 6 years!
And here's the ironic convergence. Greek bonds have defaulted. Fire anyone who uses the word "risk-free"! Your risk free bond portfolio just goose egged and your advisor never told you that when they were hawking their "safe" product. And to actually bring back some semblance of a chance that the Greek economy could get back on a positive GDP track with rational structural reforms designed to root out incompetence and corruption, the citizens of Greece were told by the media that they were voting for or against "austerity". Far from it. They were being asked to consider advice that would root out tax evasion, address public sector corruption, and hold pension investment managers accountable.
So who came up with the word "Austerity" for this vote? The same people who came up with the nonsensical "Occupy". When We The People are gullible enough to fall for a catch phrase rather than reading the substance behind the hype we wind up exposing our collective jugulars to the voracious predators who are more than happy to exsanguinate us. They may be corrupt politicians. They may be "financial advisors". They may be priests, activists, or any other predator that hides behind sanctioned purveyance of fear and risk. And there's the point. If you are told to do something based on fear or risk of loss, the likelihood is high that you're in the presence of a predator. You will not flourish. Your fortunes will not rise. You will simply be another in the long line of prey from which life is extracted until there is no more and then they'll move on.
In the past few months, I've been honored to work with some amazing people who are manifesting a new investment paradigm with us. In the architecting of our newest fund, the newly energized partners with whom I'm working were asked, "What are the core principals you want to build into the fund's mandate?" Their answers were evidence that the alternative is within our reach.
"Our fund should require total transparency of the positions in which it invests."
"Our fund should allocate a portion of its earnings to create scholarships for financial literacy for others."
"Our fund should only accept money from those who commit to their own financial education."
Is there a better way? Absolutely. And we're doing it.