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We humans are as creative on the "Dark Side" of commercial
activity as we are in developing beneficial new products and services.
In the face of huge financial benefits, however, some corporate
executives can't resist taking an extra dessert even before their
shareholders have finished dinner. Some scandals have more of an impact
on investors than others, and most produce unwarranted layers of
government regulation and control that stifle honest creativity.
Plain vanilla fraud and theft are less worrisome to me than situations
where the general acceptance of misinformation or "business as usual"
practices allows inherently bad product ideas and blatant mismanagement
to become accepted by regulatory authorities, financial professionals,
and myopically gullible consumers. Here are some candidates for future
"Blockbuster Scandal Awards" (B S Awards, if you will): Variable Life
Insurance & Annuities, Wrap Fee Managed Investment Accounts,
Portfolio Window Dressing, Asset Allocation Mutual Funds, and Obscene
Executive Compensation.
1) Variable Insurance and Annuities: Variable products are a relatively
new thing in the insurance industry, circa 1980 or so. Before that, the
conventional wisdom labeled the Shock Market much too risky for Life
Insurance Policy and Annuity Contract guaranteed benefits. In fact,
these benefits had been "guaranteed" for so long that it became a
generic expectation of anyone in the market for either. So why did the
State Insurance departments cave in to the Variable Product lobby? And
what is not emphasized as these products are marketed to potential
insureds and annuitants?
As if the 8% sales commission on Straight Life Annuities wasn't enough,
the addition of Mutual Fund bonuses made the Variable Annuity
irresistible... to financial professionals. Similarly, this product is
so lucrative for the companies that they manipulate their rates to
become more competitive. Since the introduction of variable benefits,
there have been more insurance company failures and scandals, and not
just a few disappointed recipients of reduced annuity payments. What's
in your retirement plan?
2)Wrap Fee Investment Accounts: From the very beginnings of wealth, the
very wealthy employed Investment Managers to protect and to grow their
portfolios. Most Investment Managers had just a few huge clients that
they tended to while the rest of the fledging financial industry
focused on property protection and estate creation through life
insurance. Most of today's (salaried) Investment Managers are employed
by Financial Institutions to supervise thousands of Mutual Funds for
millions of investors of all financial shapes and sizes. There are more
Equity Mutual Funds than there are individual Equities on the New York
Stock Exchange. Most investors today will employ many Investment
Managers and never actually speak to any of them.
Enter the personally managed investment portfolio product offered by
most major Financial Institutions. For a single fee, you receive the
personal services of a professional Investment Manager, and a portfolio
specifically designed for you. Except, of course, that you get neither.
You get precisely the same portfolio as everybody else, and all at once
regardless of price... a Mutual Fund with individual statements. But of
course, you can speak to the manager any time you like, change your
asset allocation, set aside a reserve for an upcoming expenditure, etc.
Yeah, sure you can!
Note that "Flat Fee" managed accounts are quite different and may actually be separately and personally managed.
3)Portfolio Window Dressing: Every quarter, every year, we hear about
the adjustments that portfolio managers are making as they attempt to
look smart to their largest clients. Now in a discipline (Investing)
that they all officially recognize as a long-term commitment to some
specific strategy or plan, why do the Masters of the Universe spend so
much time manipulating their short-term performance numbers? And why is
this considered business as usual instead of common fraud?
4)Asset Allocation Mutual Funds: I look at Asset Allocation a bit
differently than most professionals seem to and I regulate and monitor
a portfolio's structure using the cost basis of securities rather than
their Market Value. But how, logically, can a one-size-fits-all Mutual
Fund be the right mix for all investors? Here's a definition found on
the Internet: "A mutual fund that rotates among stocks, bonds, and
money market securities to maximize return on investment and minimize
risk". And a definition of Asset Allocation from a similar source: "The
practice of distributing a certain percentage of a portfolio between
different types of investment assets, such as stocks, bonds, mutual
funds, cash, real estate, options, etc. By diversifying an individual's
asset base, one hopes to create a favorable risk/reward ratio for a
portfolio".
In reality, Asset Allocation is a structure-planning tool that
determines what percentage of an Investment Portfolio is to be invested
for Growth in Equity securities and what percentage is to be invested
for income production. The proper allocation is a function of the
investor's age, marital status, financial position, employment status,
retirement plans, expenditure needs, risk tolerance, family
responsibilities, etc. Diversification occurs within the two (just two)
asset classes. One size fits all... who's kidding whom?
5) Corporate Executive Compensation: I strongly believe that everyone
has the right to become filthy rich, legally of course. I respect
anyone who gets there honestly because their success creates jobs,
opportunities, wealth, and a higher standard of living for everyone.
But, once they sell shares of their successful enterprises to the
public, they have a responsibility to share future profits and growth.
Obscene executive suite compensation (right down to the chauffeured
limousines) is simply stealing from shareholders.
With every new Scandal, a voracious Media and a hypocritical Congress
exacerbate the fear of shocked investors and call for more regulation
of the very entities whose success, freedom, viability, and
competitiveness they should be nurturing. Ironically, politicians are
always the most outspoken critics... probably because of their
familiarity with cover-ups and improprieties. But no one ever questions
the integrity of the Financial Institutions that invent, produce,
price, and promote products and services that do far more long-term
harm than the few (albeit serious and sensational) incidents of
corporate wrong doing.
Four of the five candidates for this year's Blockbuster Scandal (B S)
Award were created on Wall Street. The fifth is ignored by it. Which
one bothers you most?
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