‘Fiduciary standard’ at risk of becoming another sales jingle

Much buzz today as the head of the Securities Exchange Commission tells Congress her agency is moving forward with a new improved standard of care in the finance sector.  See:  Sec chief forges ahead on financial advisor regs.

It has been nearly 5 years since the 2010 Dodd-Frank Act gave the SEC authority to create regulation that would impose a uniform fiduciary standard of care for retail investment advice.  In the meantime heavy lobbying from the fee-drunk financial industry has managed to stall any meaningful reforms.

Throughout North American and most of the world, brokers, investment banks, fund sellers and insurers are currently held to a low-hurdle ‘suitability standard’ where commission models and conflicts of interest routinely place sales targets ahead of the best interests of their customers.   Trusting customers are referred to as “low hanging fruit”–a “distribution channel” for the firm’s underwriting issues– amid sales incentives that push for what management likes to call “a larger share of the customer’s wallet.”

At the opposite end are registered investment advisers who are held to a “fiduciary standard” which legally requires them to place the best interests of the client ahead of their own profits, not collect secret fees, and disclose and remove themselves from any conflicts of interest with the client.

The trouble is that in the 1980′s the financial business began rolling back the 1930′s enacted divisions between financial sales and advisory services.  Continuing in the 1990′s, the relentless chipping away and eventual elimination of Glass Steagall divisions, allowed for financial conglomerates to style their sales model as financial advice, without having to accept any of the fiduciary obligations.

The result is a financial sector now so incestuous, so conflicted and so used to freely raping and pillaging the savings of its customers, that it has achieved an unprecedented pass to harvest all of the profits with none of the responsibility for client harm.  Nay, not even for their own financial harm.  As seen since the 2008 financial crisis, the sector has been repeatedly bailed out by central banks and governments, enjoying near perfect immunity from all the downside consequences of their own reckless actions.

SEC head Ms. White told Congress today that “it’s beyond time” for new rules on financial advisers.  Nothing could be more accurate;  but the dark truth is this:  the regulatory heads- Obama, the SEC, and the Department of Labour are all swaying to industry pressure and talking about a new more ‘flexible’ fiduciary standard.  One that allows for commissions, enhanced financial incentives for certain products, and conflicts of interest with the client, so long as they are ‘disclosed’.  In other words, a standard which is improved in name only.

Behind the scenes, the financial lobby is working to gut the critical tenets that were established by the courts through decades of jurisprudence and equitable principles.  They think they can bend ‘fiduciary’ to serve their own best interests and still sell it to the public as an improved standard.

If this is allowed, the industry will once more succeed in queering a long standing ethical principle into just another sales jingle, as they have done with the word ‘adviser’ over the past 30 years.  In the process, financial stability and our entire social fabric will continue to the pay crushing costs for their insatiable profits.

This madness has to end.  We simply cannot afford it in any way.

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Monica Lewinsky on public shaming as bloodsport

Lewinsky made the decision to have an affair with a married man who also happened to be the President, and for this she suffered personal consequences. The relevant public issue in my view, was not the infidelity, but rather that Bill Clinton, a lawyer and commander in chief of the world’s most influential democracy, lied under oath in his impeachment hearing and, not only got away with it, but continued to enjoy his position of enormous power and privilege after doing so. Without integrity, civilized society breaks down. When leaders are seen to subvert justice and benefit from it, they harm the very foundation of democracy. For me, this saga will always immortalize the many double-standards not only between men and women, but also between figureheads and the rest of us. Lewinsky’s recent Ted Talk is thought-provoking on many levels.

“Public shaming as a blood sport has to stop,” says Monica Lewinsky. In 1998, she says, “I was Patient Zero of losing a personal reputation on a global scale almost instantaneously.” Today, the kind of online public shaming she went through has become constant — and can turn deadly. In a brave talk, she takes a hard look at our online culture of humiliation, and asks for a different way. Here is a direct video link.

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The problem with stock buybacks

Why high corporate profits aren’t translating into widespread economic prosperity, as explained in William Lazonick’s HBR article, “Profits Without Prosperity.”  Here is a video report.


Five years after the official end of the Great Recession, corporate profits are high, and the stock market is booming. Yet most Americans are not sharing in the recovery. While the top 0.1% of income recipients—which include most of the highest-ranking corporate executives—reap almost all the income gains, good jobs keep disappearing, and new employment opportunities tend to be insecure and underpaid. Corporate profitability is not translating into widespread economic prosperity.

The allocation of corporate profits to stock buybacks deserves much of the blame. Consider the 449 companies in the S&P 500 index that were publicly listed from 2003 through 2012. During that period those companies used 54% of their earnings—a total of $2.4 trillion—to buy back their own stock, almost all through purchases on the open market. Dividends absorbed an additional 37% of their earnings. That left very little for investments in productive capabilities or higher incomes for employees.

As shown below, the net effect of all this ‘financial engineering’ is that it is fleeting.  We are today in the midst of the third unsustainable bubble in asset prices in 15 years. And each time the bubble bursts–as it must and always does–the apparent net worth gains evaporate quickly, revealing deficits, shortfalls and under-investment in the real economy as far as the eye can see.  The deficits last, while the net worth gains do not.

Net worth bubbles since 1970

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Chinese economy contracts in March

An initial reading the Chinese manufacturing sector saw activity drop to an 11-month low in March, but analysts may be more worried about the government’s push for much-needed structural reforms. Here is a direct video.


Listen to the long always Fidelity salesperson in this clip explain how they are not concerned (ie. reducing their equity exposure on this news–because they need to keep the equity dream alive for people to keep buying their funds), or as she says they remain confident that Chinese consumers will start spending any day now to drive the economy so that the government firehouse of debt-spending (that has quadrupled total credit in the Chinese economy since 2008 to now some 282% of GDP) can back out as the primary growth engine it has been over the past 8 years.  Best wishes.

In reality, consumer spending in China has declined with employment since the 2008 recession. Chinese people are still largely responsible for their own social security and healthcare and save about 35% of their income as a result (compared with maybe a 5% savings rate in North America). The Chinese saving rate is going up not down.  Moreover while many were trying to improve their net worth by using free-flowing credit to speculate on housing the past few years, home prices are now in retreat and in February, registered 6 straight months of decline in 69 of 70 Chinese cities.

The trouble with investing speculating on credit is that when prices fall you are left with not just capital losses on the property but negative equity and often negative cash flow after making the debt payments.  This is what prompts people who thought they were ‘investors’ to suddenly start liquidating.  If they can find a buyer.  Which drives prices down further and compounds losses…and so on.  The world over, it is always the same.

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No quick fix to save oil prices this time

After a short-lived rebound in energy shares between January and February, the energy sector index (XEG) remains down 35% from its June 2014 high. Interim bounces notwithstanding, it is likely that energy shares have further to fall as investors lose patience and prices couple with the reality of falling oil. Unlike the March 2009 ‘V’-shaped rebound, this time there is little prospect of ‘monetary magic’ to reignite animal spirits. With energy cos still 21% of the Canadian stock market (S&P/TSX), the downside for the broader market looms ominous.

This chart of sector heavyweight Suncor (red) versus the price of crude (WTI in black) offers some insight on the price risk still inherent to date.

Suncor March 23 2015

The collapse in the market for Canada’s heavy crude below $30 a barrel last week is hammering home a harsh reality for the nation’s oil-sands producers: There’s no one to save them this time.

Unlike previous market crashes that were relatively short- lived, the combination of persistent oversupplies and weakening demand are dealing a severe setback to what’s been one of the biggest growth stories in global energy markets. Oil-sands companies such as Suncor Energy Inc. already have been rethinking major developments that can require more than $10 billion in investment. Now even existing projects are barely covering costs or in a losing position…

When the price of Canadian crude fell to similar depths in 2009, U.S. monetary policy helped prevent a financial crisis from deepening and boosted demand for oil, setting the stage for a relatively swift recovery. This time around, there’s no end in sight to the oil glut, leaving companies no choice but to drastically cut costs to survive.

The rule of thumb for new projects in Canada’s oil sands is that a West Texas Intermediate crude price of about $80 a barrel is needed to earn a return. The paste-like fossil fuel from northern Alberta is selling at a discount of about $13 a barrel compared to U.S. crude, which is now well under $50. See: Oil sands tested as rout hammers home harsh reality

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Canadian economy looking recessionary

2015 is off to a weak start in Canada: both manufacturing and retail sales fell 1.7% in January while exports fell 2.8%–so far a much weaker loonie is not having the boosting effect that bulls had forecast.

The Bank of Canada had projected annualized growth of 1.5% in the first quarter, but with one week to go, that target is looking overly optimistic again. Q1 growth is setting up to be flat to negative. And job losses for Canada’s highly indebted consumers, are only just started. Plunging revenues are spreading from the energy patch to the other interconnected sectors.

Canadian employers are reluctant to hire, and it’s not just because of low oil prices.

Year-over-year employment growth in Canada has been below 1 per cent for 15 months in a row, the longest stretch below that mark for annual job gains, outside of recessions, in almost 40 years of record-keeping.

This slow growth reflects caution among employers who are reluctant to add staff in an uncertain economic climate, now compounded by currency and commodity price volatility. Without clarity that business conditions will improve, many employers are aiming to keep costs down by avoiding adding to permanent payrolls.

Companies “want to take advantage of better business activity by improving productivity,” said Rowan O’Grady, president of recruiting firm Hays Canada. “But there’s still a lack of confidence … to be in a position where they’re doing a lot of hiring.”

Rather than risk adding to head counts, he said, many are instead asking one person to take on two roles, hiring only on a temporary or contract basis and holding off on big decisions to expand.

Employers shed 1,000 positions last month, according to Statistics Canada, and the jobless rate rose two notches to a five-month high of 6.8 per cent as more people looked for work. Annual employment growth has hovered at about 0.6 per cent in the 15 months since December, 2013.

The last period of least 15 months of growth below 1 per cent was during the 2008-2009 recession…

See: Anemic job growth streak earns place in the record book

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