Memory serves

Yesterday I had the pleasure of attending a ceremony for yet another friend who was being sworn in as a judge. The proceedings were held at the same courthouse that I used to frequent as a young lawyer now more than 17 years ago. It is always fun to see deserving people receive recognition and I enjoyed the experience immensely. As I sat there with my old colleagues from the bar and judiciary I was happy to be back in the company of so many good people. At the after party, there was much catching up to do, and once more conversations turned several times to whether I missed being a practicing barrister. My answer without hesitation is no, I do not miss the practice of law. But I do miss the culture. I miss being part of a profession where ethics and fiduciary duty are the revered foundations rather than foreign concepts and worthless marketing jingles.

There are definitely crooked and unethical lawyers who put their own best interests ahead of protecting their clients. But they are the exception not the norm. Where lawyers breach their professional duty, they are usually reported to regulators, investigated, prosecuted–and where substantiated–disciplined, suspended and disbarred from practice. In the world of finance on the other hand, the majority of those handing out investment advice are not held to fiduciary standards. Even those who are, routinely place their own profit interests ahead of the best interests of their clients. This is widely evident today in financial commentators who acknowledge that asset prices are extreme but do not have the courage to counsel lowering capital risk, citing “career risk” for themselves in moving against popular mania. In truth, one cannot avoid career risk in the money business. In failing to protect capital from incoming bear markets, mainstream financial types confront their career risk every market cycle near price bottoms when they are repeatedly fired by angry clients. Of course by then, it is too late as losses will have already taken their financial, psychological and emotional toll on everyone involved.

Most in finance do not even recognize their glaring conflicts of interest. Indeed the financial sector depends on a systemic lack of accountability and transparency in order to operate. Only a handful of the most egregious actors are prosecuted and even then most are simply fined(a cost of doing their business) with permission to continue.

Even more disconcerting however is how vulnerable and naive the public continues to be about which advisers are worthy of their trust. In finance it is not those who work hardest to protect and serve their clients that are most revered, but rather those who are the most reckless with their client capital and make the most fees for themselves. Each cycle followers suffer handsomely for their error of judgment.

Recent data shows, retail investors are being seduced back to the risk-sellers today with the highest capital inflows since the last cycle peak in 2007. In contrast, those who exercise the greatest skill, prudence and care for capital are today suffering through our version of a bear market: one where we look foolish for “missing out” and must earn little in order to protect against the losses inherent in today’s market jubilance.

At the end of 2013, the financial business will rejoice in dropping their capital implosion numbers of 2008 from their 5 year return numbers and a gullible public will be increasingly attracted to the highest risk strategies just in time for the next bear market to whack their savings. Very few people will be liquid, protected and prepared to invest near the next cyclical bottom. But none of this is new. Over the years, wise people have repeatedly warned participants of the extreme brevity of financial memory. In my own experience, I have been amazed to see that the financial memory of many after suffering large losses, is less than 2 years. In A Short History of Financial Euphoria, John Kenneth Galbraith explains:

“In consequence, financial disaster is quickly forgotten. In further consequence, when the same or closely similar circumstances occur again, sometimes in a few years, they are hailed by a new, often youthful, and always extremely self-confident generation as a brilliantly innovative discovery in the financial and larger economic world. There can be few fields of human endeavor in which history counts for so little as in the world of finance.”

Writing 25 years after the crash of ’29, in his timeless book, “The Great Crash of 1929,” Galbraith adds:

“The sense of responsibility in the financial community for the community as a whole is not small. It is nearly nil.”

Yes I loathe the culture of greed and self-dealing rampant in the financial community. But as a mentor once reminded me, if the few honest fiduciaries leave there will be no hope or help for those who desperately need good advice and are willing to follow it. And so we press on, assured that the looming loss cycle will once more reveal truth and just rewards for all…for so long at least, as one’s memory serves.

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