Dealing with conflicts of interest
Investors take note. Conflicts are part of the investment industry’s fibre.
For investors looking for information about companies, markets and investment products, there has arguably never been a better time to navigate the landscape.
Traders are sharing charts on Twitter. Market commentators punt their stock picks on radio. Print and online columnists tell you why you should (or shouldn’t) take money offshore. Financial journalists share their two cents worth about whatever will get them one more click. Your fund manager or advisor e-mails you newsletters with detailed material explaining why your portfolio hasn’t lived up to expectations and calls for patience.
Despite an overwhelming flood of material, sound long-term financial decision-making remains difficult, possibly even more so in the information age. Behavioural biases are alive and well. Moreover, financial products are not like cars or electronics that are purchased and used immediately. As a result, you may only become aware of the defects when your insurance claim is denied or when the stock loses 90% of its value overnight.
To add insult to injury, the financial services industry is inherently conflicted and despite regulatory efforts, this is not something that will change. Transparency may improve and commissions may fall away, but interests will never be completely aligned. Products may also be incredibly complex.
So how does one navigate this landscape to best position yourself to meet your goals? With amplified awareness and a healthy sense of scepticism, I would argue. The next time you find yourself wondering whether you should follow the recommendation of a particular commentator, columnist, market watcher or financial journalist, ask yourself these questions.
The sheer volume of financial information can complicate decision making.
1. Is this commentator making money from this position or recommendation?
It’s the type of transparency that is often lacking when commentators start punting positions or sharing their views.
If pundits were forced to show the market their position (or “book”), investors will likely be able to predict what their recommendation will be. But often it is only the recommendation or advice that is communicated.
Did the fund manager take a short position in a particular company? Then naturally they will tell the market that this is a disaster waiting to happen. Does the financial advisor get an ongoing fee when recommending a living annuity, and just a once-off fee when recommending a guaranteed annuity? Even though the former may really be more appropriate for the client’s specific circumstances, is the client aware of this so they can make up their own mind?
There is a reason asset managers get worked up when people question whether some of their clients are drawing too much from their living annuities. If investors start associating “running out of money” with the living annuity product, the popularity of these products will decline and guess what – the asset manager will make less money.
There are great fund managers, advisors and financial commentators out there. Arguably, the best financial products are created to solve a legitimate need while making a reasonable amount of money for the firm so that it can create jobs, support employees and reward shareholders, but it is important to be aware that there is a conflict and that the commentator’s position may have an impact on their recommendation or arguments.
Can experts be held accountable for their podium views?
2. Will the expert be accountable if I suffer a loss?
If someone punts an interesting stock or unit trust on radio, there is a good chance that there will be no liability or any responsibility on their part if you decide to invest and lose money as a result.
Moreover, while a certain financial product may be appropriate for the commentator and their clients or family, it does not necessarily mean that it is a relevant choice for the broader listenership – which will likely include a wide range of individuals with very different circumstances.
It is much easier to provide an opinion if there is no accountability when it turns out you were wrong.
3. Is the timeframe relevant?
There is an inherent conflict between investing, which is a long-term endeavour, and financial news, which is short term in nature.
News media will tend to highlight the events of a particular day or shorter-term period, which will often be irrelevant for a pension fund investor with a 40-year investment horizon.
Similarly, a market watcher may say that they like a particular stock. But if they invested in the company two years ago when the share price was 20% lower than it is now, does it still make it a good investment today? Maybe, but not necessarily.
A graph highlighting a manager’s performance over the last year may show fantastic outperformance relative to the benchmark or peers, but is the timeframe relevant? The outperformance may be a result of significant underperformance in the previous period. A conclusion that the fund can outperform over the long term based on a carefully chosen marketing graph may not be correct.
Lies, damn lies and statistics. Performances can vary dramatically depending on the time-frames used.
4. Is this accurate? Or is an important consideration missing?
While the information conveyed might be accurate, there are often important considerations that may not be disclosed even though they may be relevant.
If an investment firm offers you a retirement annuity saying you won’t pay any administration fees during the first year, it may sound compelling. But what about the asset management and financial advice fees, and Vat? It may be no less expensive than similar products when all the fees are taken into account; overall, the value proposition may not be any different.
Or an asset manager might tell you that they believe performance fees align the interests of their clients with that of the firm. Mmm, okay … but if your base fee is already 40 to 100 basis points higher than that of an index provider (in other words, the investor pays a premium for your ability to outperform) why should the investor also pay a performance fee for outperformance, something they paid you a premium to do in the first place? The argument becomes even weaker once you realise that the benchmark may not even be the index, but the average of a basket of peers, the majority of whom have underperformed the index.
So what am I saying? That the investment industry and financial media are a bunch of liars who only care about
That I’m a cynic with an axe to grind and that I too have a vested interest here? Probably.
Ultimately, the point is not that you should ignore everyone with an opinion, but to understand what really informs a
Conflicts of interest are here to stay. The best we can do as investors is make sure we are aware of how they may influence investment messaging and our decisions to jump on board.■