I was do a bit of additional reading on the article I posted the other day regarding the seemingly robust secondary market for brokers who had been involved in some form of malfeasance when I came across this excellent analysis of the article by Michael Kitcess. The entire piece is well worth reading. The analysis includes this rather disturbing table that highlights the fact that at the top of table is a firm where 1 in 5 of the staff have been done for dishonesty.
The take home point of this is that there is an enormous gulf in what the industry believes is honest practice and what the rest of the world sees as doing the right thing. Financial institutions are more often than not in direct conflict with their customers and see their customers as little more than sheep to be fleeced ala Commonwealth Bank. Whilst, the data used is drawn from the American experience there is no reason not to assume that the same ratio of misconduct is not occurring domestically.
When dealing with any form of financial advisor it is best to remember that this industry had to be dragged kicking and screaming towards the notion of acting in the best interest of the client.
I have copied the abstract of this paper below. In a nutshell it says that financial misconduct of advisors does have a cost. However, the cost is not as severe as you think since advisors are able to find employment at other firms after being disciplined. The downside of this for the consumer is that sooner or later you will run into one of the cheating bastards that were dismissed from the Commonwealth Bank
This is actually quote a novel little paper.
We construct a novel database containing the universe of financial advisers in the United States from 2005 to 2015, representing approximately 10% of employment of the finance and insurance sector. Roughly 7% of advisers have misconduct records. Prior offenders are five times as likely to engage in new misconduct as the average financial adviser. Firms discipline misconduct: approximately half of financial advisers lose their job after misconduct. The labor market partially undoes firm-level discipline: of these advisers, 44% are reemployed in the financial services industry within a year. Reemployment is not costless. Following misconduct, advisers face longer unemployment spells, and move to less reputable firms, with a 10% reduction in compensation. Additionally, firms that hire these advisers also have higher rates of prior misconduct themselves. We find similar results for advisers of dissolved firms, in which all advisers are forced to find new employment independent of past misconduct or performance. Firms that persistently engage in misconduct coexist with firms that have clean records. We show that differences in consumer sophistication may be partially responsible for this phenomenon: misconduct is concentrated in firms with retail customers and in counties with low education, elderly populations, and high incomes. Our findings suggest that some firms “specialize” in misconduct and cater to unsophisticated consumers, while others use their reputation to attract sophisticated consumers.
More here – The National Bureau For Economic Research
One of the reasons I hate politicians and their associated minions is not that they are lying, cheating, self serving pieces of shit but rather that they offend one of my prime sensibilities. In my world the thing that has always mattered the most is data – anyone who resorts to narrative to push a point of view in the absence of data is worthless and has nothing to offer to any debate. Social policy in all its manifest forms is largely an evidence free zone. It doesn’t matter what area you examine be it health, education or urban planning there seems to be very little data to support any policy initiative other than it being driven by an underlying dogma.
Having returned from travelling I have noticed a host of peanuts fizzing at the bung about the apparent need to begin indefinitely holding 14 years old without charge in the wake of the terrible event in Sydney earlier this month. So it was time to go to the data and see if the hyper emotional rhetoric has any basis in fact. To do this I took some full year of close to full year figures that I could find for some causes of death locally and plotted them. The results are below.
Dont be deceived by the relative size of the bars, this data is plotted logarithmically – look at the numbers on the top of each bar. I had to do this because of the enormous disparity in the actual numbers. We have many societal ills in Australia ranging from the awful scourge of domestic violence to the inordinate number of people who are in such pain that they take their own lives. Terror is not one of them. The central issue here is that narrative is designed to confirm and inflame an existing bias, data is designed to be free of bias.
The relevance of this to trading or in fact any form of investing is obvious. What you think to be true may not actually be true, only the data can tell you what is true and what is merely a figment of your imagination.
I spotted this piece whilst travelling and wasn’t really going to comment as I thought it was just another attempt to defend an industry that is largely indefensible by way of its incompetence and lack of morality. the piece itself is merely a sides dig at robo advising. For those who are unfamiliar with the subject matter robo advisors or very powerful computer programs are now making their way into the field of financial planning. These algorithm allow investors to input a series of metrics and the program will generate a portfolio for them and the assume. this morning whilst cleaning out my evernote folder I had another glance and there was one passage that irked me in particular.
The point in question was this –
Only so much can be achieved with a computer algorithm. Humans are deeply influenced by body language and facial expressions and the trust factor.
A good adviser will also be able to “read” the consumer; their level of sophistication and so on.
They should be able to talk the people who come to see them out of making silly decisions.
The real sticking point for me is the use of the word trust. The assumption implicit within this statement is that there is something special about human financial planners and their desire to act honestly. To put human financial planners into context the following points are worth remembering.
1. The financial planning industry fought against a best interests test. As a moral principle they did not believe that the interests of the client came first. This is a staggering admission as to the culture of an industry and what it believes to be important.
2. They fought against the notion of removing trailing commissions or being paid for annual reviews that they did not undertake. Being paid for doing nothing and not telling the client you were doing nothing appears to be standard practice within the industry.
3. CBA, NAB, ANZ and Macquarie have all been implicated in scandals where they deliberately misled and in some cases stole from clients in an orchestrated manner. They then sought to cover up this malfeasance.
4. Auditing of financial planners by ASIC found that only 3% of plans were good for clients –
“Retirement-related advice has produced disappointingly high levels of poor quality advice,” said ASIC commissioner Peter Kell.
So why did the industry rate poorly?
Mr Kell said planners failed to paint their clients a realistic picture of how supportive their retirement savings would be to their lifestyle.
Whilst 61% of the reviewed plans were deemed ‘adequate’, Mr Kell said that much of the advice given was too generic for clients.
Additionally, conflicts of interests continued to be an issue for the industry. “Often a client will go to see an adviser wanting to know when they can retire and instead leave with a new accumulation product,” Mr Kell said.
In the public hearing, Mr Kell also added that 35% of retirement-related advice was poor.
This problem of poor advice is not a new one, the Australian Consumers Association and ASIC found exactly the same thing in 2003 –
Out of 124 financial plans studied, the study rated only two as “very good”. A further 23 plans, or 19 per cent, were ranked “good” and 29 per cent were “OK”.
Ten per cent of plans were rated “very poor” and 17 per cent “poor”. Major deficiencies were identified in the 24 per cent rated “borderline”.
“The overall quality of the plans was disappointing,” the report says. “Only half the planners provided a financial plan that was judged acceptable.”
Fifty-three investors took part in the study, with each participant approaching three planners seeking a comprehensive financial plan.
The report says high fees do not guarantee a quality plan, with 24 per cent of plans costing more than $4000 rated “poor” or “very poor”.
Of those planners with links to a big financial institution supplying investment “products”, 67 per cent recommended that at least some of the money be invested with that group.
“A common observation by several judges was that clients’ interests did not appear to be the sole factor in the plan strategy or product selection,” the report says.
“They characterised this practice as commission-driven product selling, not impartial advice.”
This does raise the question as to why such poor performance has been allowed to persist. I would suggest it is because of a complete lack of interest by the industry to clean up its house and an unwillingness of a poorly resourced regulator to bring serious chargers against very powerful opponents. As I wrote earlier attempts to clean up the industry are doomed to fail –
It is now thought by those in government that the solution to this problem is better education – financial planners will be required to be degree rather than diploma qualified. The belief here is that being more educated will somehow have an effect upon the behaviour of rogue financial advisors and the organisations that allow them to flourish. This false nexus misses the point that education has nothing to do with culture. The culture of an organisation is the external manifestation of the philosophy and morality of those involved in an organisation. It is generated by those at the head of an organisation and filters down. Altering the educational standard of those giving advice will do nothing to fix a poor culture. Such a result can only be achieved by removing those at the top of the organisation who perpetuate belief structures that place the interest of the client behind the interest of the individual.
Whilst, I do agree that you could program a machine to take a clip from the client in the way casino’s do with their machine based games, attempts to defend an industry that seems unable to do the right thing will always ring hollow no matter what straw man is held up.
PS – The best solution I can think is to nationalise the industry and force everyone simply to buy an index fund – it will put a large number of shonks back driving taxi’s which is where they were before a weekend course made them a financial planner and it will go some way to solving our looming retirement crisis.
On May 27, in her first major prosecutorial act as the new U.S. attorney general, Loretta Lynch unsealed a 47-count indictment against nine FIFA officials and another five corporate executives. She was passionate about their wrongdoing. “The indictment alleges corruption that is rampant, systemic, and deep-rooted both abroad and here in the United States,” she said. “Today’s action makes clear that this Department of Justice intends to end any such corrupt practices, to root out misconduct, and to bring wrongdoers to justice.”
Lost in the hoopla surrounding the event was a depressing fact. Lynch and her predecessor, Eric Holder, appear to have turned the page on a more relevant vein of wrongdoing: the profligate and dishonest behavior of Wall Street bankers, traders, and executives in the years leading up to the 2008 financial crisis. How we arrived at a place where Wall Street misdeeds go virtually unpunished while soccer executives in Switzerland get arrested is murky at best. But the legal window for punishing Wall Street bankers for fraudulent actions that contributed to the 2008 crash has just about closed. It seems an apt time to ask: In the biggest picture, what justice has been achieved?
Since 2009, 49 financial institutions have paid various government entities and private plaintiffs nearly $190 billion in fines and settlements, according to an analysis by the investment bank Keefe, Bruyette & Woods. That may seem like a big number, but the money has come from shareholders, not individual bankers. (Settlements were levied on corporations, not specific employees, and paid out as corporate expenses—in some cases, tax-deductible ones.) In early 2014, just weeks after Jamie Dimon, the CEO of JPMorgan Chase, settled out of court with the Justice Department, the bank’s board of directors gave him a 74 percent raise, bringing his salary to $20 million.
More here – The Atlantic
PS – Whilst repeated on a much smaller scale there seems to be a marked inertia when it comes to dealing with malfeasance within the financial advisory industry and against a variety of property wealth creation schemes locally. My hit prediction – in five years time we will be having discussions about why not action was taken against the big banks and their financial advisors.