Juggling Dynamite

The past decade of escalating debt has led to falling due diligence and investment return prospects, and fueled rampant speculation in so many areas– especially real estate.  Somehow the more expensive and opulent the projects appear, the more gullible and trusting the ‘investors’.

Whether its condo developers and board members siphoning off funds for their own personal spending, mortgage fraud in Canadian lenders, or ridiculous schemes building multi-million dollar homes on ‘spec’, the end result is typical:  lost funds and lawsuits.  See this one  The alleged $1.2 billion Ponzi scheme sapping LA’s property market:

When real-estate developer Woodbridge Group of Companies bought the famous Owlwood estate in Los Angeles in September 2016, the $90 million transaction marked the pinnacle of a nearly four-year property acquisition spree. The company announced it planned to preserve the 1930s-era, Holmby Hills property—once owned by Tony Curtis and later by the pop duo Sonny & Cher—renovate it and add square footage before relisting it.

By July 2017, with none of the work completed, Woodbridge put the property back on the market for $180 million, far above the record price for a Los Angeles home. In a statement announcing the listing, Woodbridge chief executive Robert Shapiro said he’d assembled a team of well-known architects to convert and upgrade the property. He said the home had gotten significant market interest after the music mogul Jay-Z hosted a Grammy Awards party there earlier that year.

According to the Securities and Exchange Commission, Mr. Shapiro was actually operating the company as a $1.2 billion Ponzi scheme, in which storied estates like Owlwood were a lure to draw investors. The SEC lawsuit, filed in December, claims that the company, controlled by Mr. Shapiro, sold unregistered securities to an estimated 7,000 retail investors—many of them elderly—who were told their funds would provide secured, short-term real-estate loans. Instead, most of the invested money funded real-estate purchases made by Shapiro-controlled shell companies, from luxury homes in L.A. to vacant lots, court papers allege. Investors collected “interest” checks that were largely funded by money from newer investors, the SEC alleges.

Fiduciary financial advice that truly puts the client’s best interests above all else is exceptionally rare in the world.  That needs to change.

As explained in the video clip below, 98% of financial ‘advisors’ today work for product sales firms or in places where they earn higher compensation for weighting assets toward higher risk equity and corporate debt products. Not surprisingly then, most clients/customers are steered into high fee, high risk products at every price, regardless of return probabilities, their life stage or risk tolerance.

Less than 2% (5000 out of 310,000) of financial ‘advisors’ in America have structured their practice as true fiduciaries, paid only by their clients, with no conflicts of interest (like being paid more on certain products) or secret profits.  The ratio in Canada is similar.  Our firm Venable Park Investment Counsel is one of the 2%.

The fact that the financial sector has successfully been fighting and delaying the requirement of a fiduciary standard in advising and asset management says everything about where industry allegiances lie–with their own profits above all else.  Clients will keep paying a heavy cost for this until they demand change.

People talk about the “new” fiduciary standard which is ironic.  The truth is that fiduciary standards are a long standing legal duty that’s been required of trustees and professionals in other fields for at least hundreds of years.  The fact that financial ‘advisors’ have ducked this requirement for so long, is the outrageous part.

Distinguishing the differences between a financial advisor and a fiduciary can be difficult. Josh Robbins explains how advisors can separate themselves. Here is a direct video link.

The new fiduciary rule from CNBC.

Two giant coal smokestacks at the former Nanticoke Generating Station were toppled this week near the north shore of Lake Erie, to make way for a new solar farm. Ontario Minister of Environment and Climate Change Chris Ballard explained that ending the use of coal for power generation in Ontario in 2013 was equivalent to taking seven million cars off our roads. Here is a direct video link.