Monthly Archives: February 2017

candidate Trump vs. President Trump on banks

February 6, 2017 By in Getting financial advice, How your broker gets paid, Investment firms, Uncategorized Tags: Leave a comment

During his presidential campaign, Donald Trump repeatedly accused Hillary Clinton of being in the pocket of the big banks and brokerage houses.  He suggested that, unlike himself, she would act as president in the banks’ favor and against the interests of ordinary Americans.  That made her “Crooked Hillary.”

So it’s at least very surprising that in his first flurry of activity as President, Trump is advocating changes in government policy that are very favorable for big bank profits, while potentially harming customers and the financial system as a whole.

eliminating fiduciary responsibility

His first action has been to derail implementation of the mandate, recently instituted by President Obama, that financial advisers handling individuals’ retirement investments act as “fiduciaries.”  Put in the simplest terms, fiduciaries have a legal obligation to act in the client’s best interest rather than in their own.  This implies not recommending products that have a history of bad performance, but which pay high sales commissions to the salesman.  Apart from the Obama exception about pension assets, stockbrokers and insurance salesmen have no such requirement today.  (Congress has repeatedly refused to enact the necessary legislation.)

an example

Donsider three investment products:

–Product A is a Vanguard index fund.  It charges 0.08% of the assets per year as a management fee.

–Product B is an XYZ brand fund that is for all practical purposes the same as an index fund. Buyers pay a commission of 5% of the assets invested to acquire shares. The fund charges 1% of assets as a management and pays your broker 0.50% of your assets yearly as what amounts to a retention fee.

–Product C is just like Product B, except that its managers have underperformed the index by 2 percentage points for each of the past ten years.

Of these three, a fiduciary can legally only recommend A.  Because a broker or other financial adviser must only do things that are good for you, not what’s best for you, he can likely recommend both B and C if he believes you won’t lose money from them.  That’s even though C will likely perform 3.5 percentage points worse than A each year.

In a world where stocks gain an average of 8% a year, the holder of C makes 4.5%.   In nine years, the holder of A will have   doubled his money.  The holder of C will probably be up by 40%.

the Trump rationale

Trump administration official Gary Cohn, formerly a high executive at Goldman Sachs, explains that Mr. Trump believes the Obama rule is bad.  Why?  …because it may reduce consumer choice by potentially driving the purveyors of high-cost, poor performance products out of business.  That is, the Obama rule somehow “hurts” people by increasing the amount of money they’ll have at retirement.  This is sort of like saying we should eliminate car safety inspections because they prevent used car dealers from selling autos with no brakes–thereby limiting consumer choice.  Media reports say the analogy Cohn actually used is that the Obama rule is like having supermarkets that can only sell food that’s good for you.  Huh?

More tomorrow.

 

Employment Situation, January 2017

February 3, 2017 By in employment, Uncategorized Tags: , , , Leave a comment

This morning at 8:30 est, the Bureau of Labor Statistics of the Labor Department issued its monthly Employment Situation report for January 2017.

The important parts, in my view:

on the positive side

— the +227,000 new jobs added is an above recent trend figure

–the workforce expanded by around half a million people during January, implying that sa significant number of previously discouraged workers are resuming their search for employment

–wages are rising at a 2.5% annual rate.  Some have expressed disappointment that wages aren’t rising faster, pointing out that the ES estimate of wage gains was higher a month ago.  On the other hand, the overall trend is in the right direction and these numbers can be quirky month-to-month.

on the negative

–the situation for the long-term unemployed is little changed over the past year

—-The number of long-term unemployed (those out of work for 27 weeks or more) is down by about a quarter-million.  But it’s still 1.9 million people, and makes up about 25% of all unemployed

—-The number marginally attached to the workforce (meaning have looked for work sometime within the past year, but not within the last four weeks) is down by 15%.  But their number is still 1.8 million.  Of that figure, 532,000 are discouraged workers (people not looking for work because they think no one will hire them), the same as this time in 2016.

 

As I’m writing this, the reaction of Wall Street is to emphasize the positive.  However, as the presidential election results show, the economically left behind are increasingly making their voices heard demanding help.

 

 

Brooklyn food coop pension woes

February 2, 2017 By in Portfolio management, Uncategorized Tags: Leave a comment

The Wall Street Journal has been reporting recently on a problem with the pension plan of a Brooklyn food coop.

The story, in brief, is this:

The coop’s pension fund for around 90 salaried employees has been managed by a coop trustee who is, or has been, employed on Wall Street.  The “strategy” was to keep a large cash balance and invest rest of the pension money in eight individual stocks, mostly early-stage biotech firms, one of which the Journal says the manager is also the largest shareholder of.

This is crazy.

The inappropriateness of a highly concentrated strategy and of management by someone other than a third-party expert surfaced last June.  Over the prior 12 months, the S&P 500 had been up slightly.  The coop was down by 20%, and the $4.8 million fund was underfunded by 40%.  As luck would have it, one of the fund’s holdings hit it big during the second half, eliminating the underfunding and allowing the fund to adopt a more conventional strategy without a lot of financial pain.

 

Although the story notes that Wall Streeters had their fingers in the pension pie, there’s no mention that any of the parties had experience or training in portfolio management in general or the management of pension funds in particular.  My guess is that’s because none of them did.  They figured that because they had, or once had, business cards from a financial firm, that was all they needed.

My experience is that with small employers like this coop this sort of thing happens all the time.  One exception, though:  the part about one holding doubling in price, bailing out the whole ill thought out enterprise, usually doesn’t happen.  The ending is typically much uglier.