Products, should be no “Carrion Comfort”….

I wanted to carry on from a thread I placed in my post on Anita Anand’s brief interview with Rob Carrick.  The excerpt of Anita’s comments, noted below, defines the area I wanted to open up, and the subsequent explanation of the thread details why I picked on this particular interview.  

“The client is a consumer so the client should be investigating the product that he or she has bought/is buying….I think you should treat your relationship with your investment advisor as you are in the driver’s seat, this is your money……..”

Anita appears to be endorsing a view that high cost product distribution, on a transaction by transaction basis, is an acceptable medium/method for investors to achieve their saving and investing objectives. 

This is rather a narrow, and in a way condescending/paternalistic, view of the financial needs of the ordinary investor and how they can shop for products to meet these needs.  Consumers should keep taking the medicine feeding the machineit appears she is saying! Shopping for expensive, often complex, and sometimes illiquid products is in my opinion a horribly sub optimal way of saving and investing. 

Most products should not be bought, yet you would not be able to discern this from the disclosure and certainly not from the marketing information.  In this case, in the absence of a clarifying proviso, her comments represented a de facto statement in support of an interest group: I am referring to the financial institutions/managers/shareholders and the intermediaries that profit from product sales.  This was not a statement supporting consumer rights, the evolution of appropriate advice, market competition and service contracts representative of the many different relationships at hand. 

Her comments worried me, but more so than if they had come from a regulator or a financial institution – such ignorant paternalistic comments are endemic amongst Canada’s regulators.   That most of these regulators are lawyers, and have little investment training and scarce insight into the modelling of the impact of products on risk/return and portfolio structure further compounds the issue. 

Anita, it would appear, was no more than an appendage of the status quo, and the OSC’s Investor Advisory Panel needs to do better.   But can it, now that we have an ex broker as the Chair of the IAP.  I think the issue of perspective is an important one, because if your line of sight is that what exists is fine, then it is less a case of supporting investor rights, but of making sure the consumer learns how to behave given the game at play.   I do have concerns as to the perspective that the IAP, as a whole can bring to consumer representation?   Note also that the Investor Education fund with its Getsmartaboutmoney website would also appear to endorse the impression that the consumer needs to be cleverer about money as opposed to omission by regulation or the industry itself.  The current chair of the IAP is also a on the board of the Investor Education fund. 

I personally do not think investors view the “advisor relationship” as purely a product purchase one, and I certainly think that proper investment advice cannot be delivered via a series of at times unrelated production transaction decisions.  I do not even believe that a series of related high cost product transactions can do the job either.

Investment products are not cans of beans and transaction decisions are not  constrained to the simple trade-offs that we see with respect to high/low fat milk, processed/complex carbs or high/low cholesterol diet decisions.  If selecting a portfolio of investments was no different from constructing a balanced daily diet from the main food groups, we would have no need for financial advisers and, government policy withstanding, margins on product sales would be wafer thin. 

I would encourage investors to read documentation…..

As far as insight gleaned from current documentation is concerned:

Much of the marketing documentation is meant to portray the product in its best light, and will often embellish the positive and under play the negative.  You will neither find the type of comparative analysis you need to assess an investment’s relative merits nor will you find the detail needed to do this analysis, if you had the expertise to do so.

The regulated disclosure documentation in most instances provides little insight into the true risks/true opportunity costs of the investment, save for boiler plate disclosure that could apply to the entire universe of risky assets. 

To properly assess the impact of a product you need to be able to assess the impact of costs, taxation, the asset allocation and risk profile and their impact on portfolio structure for a given set of financial needs.  All this requires some element of comparative modelling and analysis.  If the investor is truly responsible for the investment decision, given the information that is deemed sufficient to make that decision, then most likely a significant majority of investment decisions are being made blind.  In truth all we are making sure is that all the boxes that “legitimise” the transaction, according to current regulation, are ticked. 

Anita in this interview, and others like her, are telling consumers to observe the protocol, when the protocol least serves their interests.  

In fact, the only way in which most consumers are going to ensure that the right product is selected, at the right price, in the right amount, in balance with the rest of their assets, in keeping with their risk profile and financial needs, is to rely on an expert who can construct plan and manage the complex interaction of assets and financial needs, and of course who does not have a conflict of interest.   Then, questions about the product, the asset allocation, the risk etc and the answers to those questions may provide a better understanding for the investor.  But this is not the regulated relationship, these are not the minimum standards that define the product distribution market place. 

If Anita had pointed this reality out, the interview would have had a physical integrity, a symmetrical relevance to the issues facing the consumer.  If you are to represent consumer rights and needs, you need to be able to see the symmetry of the problem, and Anita, and possibly many others fail at this critical intellectual level.  No real objective thought is being applied to consumer issues, by certain key individuals, in the regulation of Canada’s financial services.

If you perceive that all products are simple, that they can be bought on their own without attention to the whole, that all the information you need to make a transaction decision is in the documentation and literature and that advisors will honestly answer all your questions without conflict, then perhaps, comments like those made by Anita may have validity.  But this is wishful thinking.  

Many products are complex and they are complex for a number of reasons:

Managing assets to meet financial needs over time requires the integration of a number of complex disciplines and processes, and products substitute for the lack of expertise, resources, systems and processes amongst those who buy and sell, but principally amongst those who sell.   The more of the portfolio process the product is designed to do, the more complex it will be.  But sometimes the complexity comes from attempts to design products that comply with many investors own behavioural biases (market return without market risk) and these types of products often have unintended negative consequences in that their risks are much more subtle and difficult to assess.    

An additional element of complexity comes from the fact that individual financial needs and risk preferences are diverse and the more complex the product the less tight the fit.  It is here where costs become more and more relevant.  The architecture for delivering products is still very much labour intensive (unsophisticated) and the costs of delivering these products compound problems associated with lack of fit.   

One of the quirks of a product is that it takes up an allocation space within the portfolio and for the more complex product this can cause problems.  Many complex products lack liquidity, or change the nature of an asset class, so that yield, risk and return and liquidity profiles change, impacting the rest of the portfolio.  You cannot make an informed decision on a complex product without being able to model its structural impact, even if it were cost effective.

In order for the vast majority of current products to be effective within a portfolio context, their cost to the investor would need to be scaled back significantly.  Costs not only invalidate the rationale of a product, but they skew the risk to the consumer and away from the product provider.   Endorsing the status quo prevents the development of competitively priced solutions to consumers’ financial needs and ignores the importance of well structured advice that places the client’s interest first in the process. 

A market place based on high cost product distribution that relies on asymmetric information and meaningless disclosure cannot be good for the consumer.  We need higher standards, a better definition of responsibility that acknowledges the complexity and realities of investment and the relationships that underpin its execution, and competition that spurs innovation to provide more efficient, appropriate and cost effective wealth management solutions. 

For a consumer advocate, or one holding an office charged with representing the consumer, to make statements that support the status quo and that ignore the universe of the issue, places the needs and rights of the consumer at continued and further risk.  

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  1. Pingback: Give investors the confidence to ask questions… Will this really solve the problem? | Depth Dynamics

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