Some Things Are Just So Predictable

Donald Trump had extra marital sex…with a lady, or ladies, of the night.

Wow. Who saw that coming?

What a surprise.

And, he even ‘tried’ to buy her, or their, silence.

Completely blindsided by that revelation too.

Seriously, some things in life are just so predictable.

All this latest stuff about The Donald is nothing more than a ‘Stormy in a D cup’.

What would have been unpredictable is news that Donald had honoured his wedding vows.

You know, the bit about ‘forsaking all others’.

But had we heard that news, we would have been immediately suspicious.

Wondering whether it was fake news or the real thing?

The Donald mixing with pretty ladies has a fairly predictable outcome.

There are other combinations where the consequences are just as foreseeable…

Speed, alcohol and fatigue…

Politicians and our money…

Fame, instant wealth and testosterone…

And that brings me to the Banking Royal Commission.

Why is anyone surprised with what’s being uncovered?

How did people think financial institutions make their profits?

By telling people to go away and save for a few more years before applying for a loan?

Or, in-house advisers suggesting to potential clients they’d be better off investing money into low cost (better performing) index funds…rather than putting the funds into their institutional masters over-priced and under-performing funds?

Bankers make money from selling products — lending, insurance and investments.

Do you think it’s coincidental that the profitability of the banking sector has gone sky high at precisely the same time as Aussie household indebtedness hits record levels?

Of course not. It was predictable.

And when you align executive bonus structures to that profitability, do you think self-interest might kick in and ‘push the edge of the envelope’?

No surprises…

You know what’s a surprise?

That it’s taken this long for a public inquiry into how these institutions went from being respected to rogues.

How many cockroaches do you need to see before you call the exterminator?

Scandal after scandal in the industry was met with the same treatment…a quick spray of the PR ‘mortein’. Everything is ok. We’ll take the garbage out and make sure you see no more ‘roaches’ in our institutional house.

When the central banks of the world are flooding the markets with cheap money, do you think these guys are going to let those profit making, and bonus paying opportunities, pass them by?

Fat chance.

Why? Because the institutional culture is just so predictable.

They say all the right things to placate the regulators and dumb down the mug punters, but it’s business as usual.

Am I being wise after the event? 

Here’s an edited extract of what I wrote in Daily Reckoning in March 2015.

The article was titled Imagine a world of truly independent advice’…

‘“86% of big-cap fund managers trailed S&P 500 in 2014” – Market Watch (New York) 12 March 2015

‘“Ex-FSC [Financial Services Council] chief John Brogden regrets ongoing financial planner scandals” – The Australian 20 March 2015

‘What do these headlines have in common?

‘They show the financial services industry is deeply flawed on a global basis.

‘The Market Watch (New York) article quoted the research of S&P Dow Jones Indices:

‘“Based on data as of Dec. 31, 2014, 86.44% of large-cap fund managers underperformed the benchmark over a one-year period. This figure is equally unfavorable when viewed over longer-term investment horizons. Over 5- and 10-year periods, respectively, 88.65% and 82.07% of large-cap managers failed to deliver incremental returns over the benchmark [index].“

‘…The financial services sector is seriously big business. Skimming 1% to 2% in fees off the top of the investment pool for “active” management is a multi-multi-billion-dollar industry.

‘Contrary to what the largely ignorant investment public think – good, mediocre or poor performance is largely irrelevant to the success of a fund management business. First and foremost, the name of the investment game is funds under management.

‘All efforts are made to increase the investment pool. The more in the pool, the greater the amount that can be siphoned off for profits and by extension, executive bonuses.

‘The big end of town knows it can never spruik its sub-par performance record to achieve the “more funds under management” objective. Therefore, the institutions focus on a (far more reliable) three-pronged approach – marketing, public relations and a tied sales force.

‘Any outperformance (however brief that may be) is seen as a welcome bonus to complement the three pronged business plan.

‘The Financial Services Council represents the who’s who of the very lucrative investment industry.

‘According to the FSC’s “Scrutiny of Financial Advice” submission to the Senate in December 2014:

“’The Council has over 125 members who are responsible for investing more than $2.2 trillion on behalf of 11 million Australians. The pool of funds under management is larger than Australia’s GDP and the capitalisation of the Australian Securities Exchange and is the third largest pool of managed funds in the world.”

‘For the majority of the 125 members, throwing a few bob in the tin to fund an industry lobby and PR group is nothing more than a rounding error. The FSC’s aim is to promote the investment industry’s agenda to government and to make it look rosy in the eyes of the public.

‘It’s for this reason the financial planning scandals would have been such a disappointment for the ex-chief. No amount of spin can make silk from that sow’s ear.

‘The FSC’s December 2014 submission to the Senate’s “Scrutiny of Financial Advice” inquiry, contained 5 major recommendations. Each recommendation was nothing more than window dressing.

‘The “elephant in the investment industry room” is the institutional employment or ownership of financial planners. No one in the industry is prepared to tackle this glaring conflict of interest. Pharmaceuticals businesses cannot own doctors. Investment institutions should not own planners. Simple. Full stop. End of Story.

‘The tied sales forces are provided incentives to recommend their institutional master’s consistently under-performing managed funds.

‘This flawed advice model is replicated the world over. The problem is the “too big to fail” end of town has so much political sway, the public will continue to pay (globally) for the industry’s greed.

‘When planning scandals erupt, the industry goes to the PR manual and looks up the chapter titled “Damage Control”. All the right PR noises are made – apologise profusely, suggest greater powers to the Regulator, harsher enforcement penalties and higher education standards.

‘The community is somewhat re-assured these “rogues” will receive their “just desserts” by the system.

‘The institutions (eventually) hold “transparent” reviews and stump up a few million dollars to right the financial wrongs of the poor advice. These compensation payments are designed to portray them as good corporate citizens.

‘In reality, this is chump change that is (somewhat) gladly paid to protect the cosy little conflict of interest arrangement they have going on.

‘When it’s all over, they sit around the board room table and say “Phew. Dodged another one”.

‘The institutions cannot risk the public joining the dots and figuring out how the investment business really works – incentivise a sales force to sell mediocre performing products that in turn increases the pool of funds from which the institutional masters extract a fee (far greater than their ability deserves) that then funds executive salaries and bonuses and the marketing machine that keeps the whole cycle going.

‘To divert the harsh glare of the public spotlight, the industry PR machine is well equipped for damage control – “move on, nothing to see here”.

‘In a nutshell, investors the world over, are being ripped off to the tune of tens of billions of dollars due to institutions being permitted to employ or own financial planners…

‘Central banks have created disaster after disaster with their academic theories on how to keep the debt super cycle going. Do you think this time is going to be any different?

‘Investment institutions (and their army of hangers-on) have built a $2.2 trillion gravy train. Do you really think they are going to act in your best interest to minimise their cut of this action?’

The big end of town’s coordinated and well-resourced lobbying efforts ensured it was ‘business as usual’. The Banking Royal Commission is the result of years of neglect from the regulators and governments (of both stripes) to act in the public’s best interest.

Here’s my prediction for what’s going to happen.

The Royal Commission — for all its efforts — will, not change too many old habits.

In the end, the ultimate ‘judge and jury’ on this saga of greed and corrupt business practices will be the market.

When the proverbial hits the fan and asset prices fall hard, you watch the public backlash on both fronts…from those who were ill-advised to invest in flawed products and those who were ‘encouraged’ to borrow too much.

Here’s another all too predictable combination…

A poorer society, greedy bankers and populist politicians.

This is combination promises to be much more than a storm in a tea cup.

Regards,

Vern Gowdie,
Editor, The Gowdie Letter


Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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