How 'independent' are financial advisors?

A new study by SEI discusses the concept of independence in the context of the money management business - with a special emphasis on retail investors and high-networth individuals. The study demonstrates that the customer of a money management firm has to understand the incentives of the advisor(s) in order to make sure that his portfolio is handled in the best possible way. When the chief executive of one of the leading investment banks and wealth managers states publicly that there is no moral obligation to take account of the customer's interests the importance of real independent advice becomes more relevant than ever.

Hedge Funds treat customers in discriminatory fashion

When even Antonio Borges, chairman of the Hedge Fund Standards Board (no, this name is no joke, though it is a misnomer if there ever was one), voices concerns about preferential deals offered to some investors and states that he "may" ask his member firms to bolster disclosure to other clients of the risks the practice poses, the lack of regulation in the hedge fund industry is laid bare for all to see. The "worrisome" practice used by more and more hedge funds of giving some clients so-called "side letters" and charging them a preferential scale of fees clearly demonstrates that the compensation and fee structure of hedge funds needs to be watched carefully by investors. These separately-negotiated agreements, which have attracted the attention of the UK's Financial Services Authority (FSA) in recent years, offer different investment terms to certain clients, some of which could disadvantage other investors.  We wonder why the FSA has not yet acted to protect investor's interests.

Be wary of forecasts and experts!

During a recent clean-out of the library I came across the following gem: In a review and comparison of the US and UK housing market published in 2005 the 'experts' came to the conclusion that 'there is no significant macroeconomic threat to home prices if our forecasts for interest rates and income growth pan out'. We can only say 'if the word if would not exist all forecasting would be much easier.

Former taxi-driver convicted for £37 million investment fraud

Investors were promised five-fold return on their investment.

Operational Risk often neglected

Most investors are focused exclusively on the quest for securing the best financial return on their investments. But recent developments have highlighted the need to ensure the safe return of the investment. Several prominent banks have been found wanting in protecting the confidentiality of client accounts held by their Swiss Branches. While no money was reported to have been lost as a consequence the fact that client records could have been transferred to a CD and the information offered to governments in surrounding states should set alarm bells ringing among investors. If it seems to be easy enough to steal customer data it may not be beyond some criminal mind to transfer money from client accounts. Clients are advised to conduct thorough due diligence on the operations of any bank or money manager they entrust their investments to. Slick advertising, tips from advisers or friends should not be the sole basis of picking a firm.

Confused by experts?

At any time you can find prominent experts predicting that a market will go up and the similar number of experts predicting that the market will go down. Now we all know that this is what makes markets and as a consequence one should never pay too much attention to any one opinion. But when George Soros states that gold is in a speculative bubble and at the same time his funds increase their long position in gold substantially one has to wonder why one should consider expert's opinions as more than background music.

Are Regulators asleep again?

There is still more talk than action in banking reform. We do not seem to be alone when making this observation. Volcker rule, Basel III, contingent capital - all these buzzwords are worthless if nothing gets implemented at some stage. News of generous bonus pools give the impression that all is back to normal in the banking world but when we had a look at the capital ratios of some large banks we were genuinely surprised - if not shocked - about the abysmal capital ratios that some of them reveal. Balance sheet totals seem to expand and the simple ratio of pure equity is in the low single-digits, and falling! So investors have to be more vigilant than ever when deciding how to allocate their investments. More than ever it is not the return on the investment that counts but the return of the investment.

Are there still any 'safe' Investments?

This question is often asked these day. And with good reason. A large part of investable assets are the debt obligation of states, regional governments, companies, private individuals and banks. While most bank deposits are guaranteed by governments that just pushes the ultimate responsibility for the repayment of bank deposits further up the chain. Only property, company shares and gold are assets that are not the liability of someone else. This explains the resilience of these assets in face of a shaky financial outlook.

Financial Adviser taken hostage

A group of German senior citizens took a financial advisor hostage that they blamed for causing them a loss of Euro 2.5 million. Now while we do not condone this behavior we do at least have some understanding for their frustration with the legal and regulatory system that all-too-often is slow moving and seems to favor those perpetrating investment frauds. It also seems only fair to use extra-judicial methods to get your money back when the governments of several countries seem to be willing to buy supposed bank details that were obtained illegally. (We stress the word supposed as they data may well have been created out of thin air in order to cash in on gullible tax authorities or to get even with people one dislikes).

Who stands behind failing Hedge Funds?

News that a number of - sometimes quite large - hedge funds are moving their operations to Switzerland or other locations (or are in the planning stage) in order to help their promoters or employees avoid taxes they deem to be excessive raises the question of the new host country's ability (or willingness) to stand behind the funds if they get into trouble. As the example of Iceland has shown, the size of the host country should stand in a reasonable relation to the size of the financial institutions that the regulators of the country have to supervise. In case of fraud or other malfeasance investors are well-advised to study the small print in the legislation regarding the regulatory structure of the host countries: Does regulation involve more than box-ticking and are investors able to claim compensation from a well-financed scheme in case of fraud or default?