Juggling Dynamite

An initial public offering of 5% of oil giant Saudi Aramco, is how the Saudi government had hoped to ‘get liquid’ by some $2 trillion this year.  After meeting with salivating bankers in New York for months, the Wall Street Journal reported yesterday that the plan is now in flux for no small part because of concern that 9/11 lawsuits against the Saudis could attach to the funds.  This is dark, here’s WSJ:

Crown Prince Mohammed bin Salman has become increasingly wary of exposing the company to 9/11 related lawsuits following a New York listing, Saudi officials say.

Evidently they’re now scouting out other IPO options in less attractive markets like Hong Kong maybe for 2019.  Trouble is they are running down their cash reserves faster than they had anticipated, oil prices are still in the low 60’s, and US shale supplies keep gushing to fill demand in the US and increasingly China.  See Economic crisis continues to haunt Saudi Arabia:

Riyadh is banking its future on raising funds from the Aramco sale. Its $2 trillion estimated of the value of the oil company is said to be over optimistic especially during uncertainty over oil price. Bin Salman’s vision requires oil price to recover in order to increase the valuation of the initial public offering of state oil company Saudi Aramco. But higher prices, industry experts point out, can bring shale supplies back even stronger.

It’s a dilemma which the Saudi’s may be unable to resolve especially since they have cut production and gone down the pecking order in key markets like China. Beijing is now the second largest destination for US crude oil exports; a trend that is set to increase. The US is likely to cover most of the world’s demand growth over the next three years while the forecast for OPEC is said to fall below current production rates in 2019 and 2020.

All this proving yet again, that it’s not about how much you make in the boom times, it’s about how much cash savings you keep and what your burn rate from expenses looks like.  Liquidity is everything.  Lesson for life.

The Financial Consumer Agency of Canada (FCAC) released its findings today after a year long review of business practices across Canada’s Big Six banks after media reports last year of inappropriate sales tactics and incentives.  No surprise they found evidence of a sales driven financial danger zone for bank customers.  See: Canada’s financial watchdog slams’ banks attempts to mitigate sales risks:

“there are insufficient controls in place at the country’s biggest banks to prevent sales of financial products that are misrepresented or unsuitable for consumers, and the banks’ sales-focused culture elevates the risk that employees may flout consumer protection rules.

The FCAC added it is investigating alleged breaches of rules of conduct designed to protect consumers, and which banks are required to follow that may have been identified during its review and will take action where appropriate.

‘Banks are in the business of making money. We know that. But the way they sell financial products and manage employee performance, combined with how they set up their governance frameworks can lead to sales cultures that are not always aligned with consumers’ interests,’  FCAC commissioner Lucie Tedesco said in a statement.”

The question remains how can we summon the public ire and political will enough to separate deposit taking banks from product sales conglomerates once more.  Scolding and fines are wholly inadequate, clearly.

The fact that the financial sales/advice business has successfully skirted the duty to put the client’s best interests ahead of their own profits is an outrage in a world dependent on fiduciary professionals for advice in many critical areas every day.

This discussion with Elliot Weissbluth, Founder and CEO of HighTower Advisors, on the rollback of DOL’s Obama-era fiduciary rule, and what it means for financial advisors and investors is on point.  Here is a direct audio link.

However even pro-fiduciary discussions fall short in scope when they focus just on the selection of picking one lower fee product over another.

Well before one gets to product selection, there are many individual details that a fiduciary must ask and consider if they are to render truly client-focused advice.  First and foremost is to ask about a client’s personal financial means including their income, DEBTS, dependents, assets and liquid savings.

Generally, it is in the individual’s best interests to review their budget/spending, pay off their personal debts (mortgages too!) and build up cash savings, before they get to making non-registered investments (outside of tax-sheltered accounts).

If someone has non-registered savings accounts and personal debts, usually the best advice is to use the non-registered savings to pay off their debts, even though this means they would have less capital to give to a financial advisor or portfolio manager.

If a financial advisor is not reviewing this issue and making this recommendation at the expense of capital that they might otherwise have brought under management, they are not putting the client’s best interests first.

And if a advisor/manager works in a place where they are paid a higher fee on client assets that are allocated to equity securities (higher risk) over fixed income (lower risk), this is also a conflict of interest that threatens their fiduciary responsibility.