Ethics and Investment Writing

There are three things that I am happy with when it comes to writing about investments:

  • I am glad that Jim Cramer invited me to write for RealMoney seven years ago.  Motown Josh Brown put together a great piece on the influence that TSCM has had on the financial media.  I heartily agree, and I don’t think we know the half of it.  I interacted with a lot of young TSCM staffers, and it amazed me what an education they got in the markets working for TSCM.  TSCM blended respect and skepticism for the markets, and though you couldn’t have done it without Cramer, the effect on the financial media exceeds him, and for that we can all be grateful, because the financial media is a lot sharper than it was 15 years ago.  (Okay, leave out much at CNBC.)  And who knows, maybe I will return to TSCM someday in some capacity; the door is open.
  • I’m glad I started my blog.  I still think that financial bloggers are the conscience of Wall Street.  There is a need for knowledgeable people to write about economic/investing/finance issues.  It does not replace journalists, but supplements them.  Intelligent commentary complements “neutral” reporting on a topic.  Journalists learn from area experts, playing them off against each other to get a fuller picture of the debate.  (As an aside, the motive to start the blog began on one of the comment boards at TSCM for Cramer.  Readers were fascinated that I would post there, and told me I needed to develop my voice.  A few called me the anti-Cramer, but I never took up that moniker.)
  • I am grateful that I am a CFA Charterholder.  Harry Markopolos recently spoke to the Baltimore CFA Society, mainly about his uncovering of the Madoff scandal, but he spent a decent amount of time explaining why the CFA Institute and our ethics code can make a huge difference in reforming Wall Street.  I was impressed; his beliefs in honesty and fair dealing drive his actions.  (I talked with him afterward, and we realized we must have met seven years before, at a regional meeting of the Northeastern CFA societies, when I was sent by the Baltimore CFA Board to represent us in a ticklish issue regarding the leadership of AIMR.  He had helped lead the effort to replace the existing leadership.)

But that’s not my major reason for writing tonight.  I want to comment on two pieces in the Wall Street Journal that comment on shady practices.

The first one is entitled Shining a Light On Murky 401(k) Fees.  The Department of Labor has the dubious distinction of being less effective than the SEC on investment regulation.  A lady I sat next to at the Denver conference regaled us with how her daughter’s 401(k) plan had expenses equal to 12%/year of assets.  I hope she made a math error, but she is a Ph. D; it’s not likely.

From my own experience at Provident Mutual in the nineties, it was easy to see how expenses could get layered.  We tried to be among the more ethical in that business, but the temptation to pay a lot in order get more business was dangled in front of us regularly, and we refused.  We had a rule that if comp was not disclosed, agents had to disclose that comp was not disclosed. And if they took nondisclosed comp, they could not have additional disclosed comp, because it would give the illusion of “That’s all I am paid.”

Do we need limits on 12b-1 fees?  I would prefer a full disclosure of fees — who and how much, poking through relationships to explain who ultimately is giving services to the 401(k) plan, and who is collecting rents as “gatekeepers” for the plan.

There is a lot to be done here.  Would that the DOL would invest a little money in buying skeptical experts, and really grasp the complexity of what is going on there.

The second one is entitled Structured Notes: Not as Safe as They Seem.  When I (along with others) was taking a demo of a custodian recently, the rep of the custodian went out of his way to show the area of the website that offered structured notes.  I commented, “Those are evil. They offer yield, but they make people short expensive options.”  After an embarrassed pause, the rep said, “Let me demonstrate an area of bonds that is not evil,” and he moved onto Agencies.  I didn’t have the heart to tweak him twice.

I wrote a piece a while ago called “Yield, the Oldest Scam in the Books.”  Structured notes offer above market yield, while that yield, or some of the capital, could be negatively affected if events perceived to be unlikely would occur.  The investment banks can hedge those risks more effectively than the Structured Noteholders can, and they pocket large profits.

The concept of “contingent protection” annoys me.  The odds of triggering such protection are much higher than the average person expects.

Do not buy structured notes.  The investment banks know far more than you.  Do not buy what others want to sell you.   Use your good mind, and buy what you like.

There is no one on Wall Street looking to do you a favor, so view your broker with skepticism.