Financial Industry – Bonus Changes and Full Accounting Needed

US universal health care has taken centre stage for the last few weeks. Come visit Australia to see how it doesn’t work even with private health funds. But that’s another story.

With the stock markets booming and company profits above estimates it appears financial regulation will go on the back-burner for now.

With the US legislature taking a “well-deserved” holiday in the middle of the worst financial crisis in history things may stay quiet until the end of the year. We may well just be in the eye of the financial storm, so all has the appearance of calm and tranquility.

It’s as we try to get out of that financial hurricane we may find we have yet another financial crisis to face.

What I read about re-regulating the markets doesn’t fill me with confidence. Let’s see,

The Congress and Senate don’t read the bills they vote on.

The fact that a Bill is not under lock and key but can be changed overnight is just amazing to me.

Many people in the Regulatory bodies are ex. Goldman Sachs or other financial institutions with very strong lobbying powers in Washington.

The financial system has changed so much and the amount of money has grown exponentially but the financial guys want the same compensation.

I remember reading an article on a dock strike in London in the 70’s I think it was. 20 Ton containers were slowly replacing the 5 ton containers used for shipping goods. It was the advent of the “container ship” as we know it today.

Rows of new 20 ton cranes were installed with heated cabins and controls that made it far easier to do the job. The crane drivers thought this was great.

Then guess what? Someone in their union said they were now much more productive as they were lifting four times the tonnage so they went on strike for 4 times the wages. Can you believe it?

There may be more to this story than I recall, but it makes the point.

It didn’t occur to them that they had no financial input in buying the cranes. The work was in fact easier for them because the new cranes made handling even 20 ton containers easier. But that didn’t matter.

Fast forward to today and the financial industry. I don’t think it is any different for the financial industry people today. They now have technology at their fingertips that they could only dream of 20-30 years ago.

They can now “lift” a thousand or more time the business they once did, not just 4 times the clients. Many of them are getting hundreds of times more compensation for doing what they did before.

The number of clients they can handle using the new technology is almost limitless. Their businesses have grown exponentially through the use of the Internet.

Many people who invest with them have never met them, never been to their offices and have never needed a sales pitch to invest with them. Many people don’t even know where their money is as the employer invests it for them.

Total acquisition costs for new investment funds these days is incredibly low. A television personality, a web site, some feeder funds, tax breaks by government, employer payments, a good trading platform and networking between financial people is often all that’s needed. Read In Goldman Sachs We Trust for more on this.

“Goldman now has a managing director in charge of alumni relations who keeps former GSers current with the firm’s best economic and market insights. Its Web site has an Alumni Network where you can search for alumni for help in finding new jobs, a list of opportunities GS knows about and GS alumni in different businesses today. In other words, a GS degree can mean a successful networking experience.”

Not only that there are thousands of “feeder financial managers” only too willing to pass on your money for someone to risk – I mean manage, whilst taking a fee for giving it to them (Bernie Madoff 🙂  ) .

It all started with governments deciding we should save for our own retirement. This has lead to a bonanza for the financial industry with millions of people pouring money into thousands of funds which then in turn “feed” that money into banks and other financial institutions who all take a “clip” from your hard earned money and then trade it like crazy to make even more money off your account.

Government sanctioned self-funded retirement is the greatest money-making machine on earth. The amount of money flowing to just a few large institutions is so large that Citi can afford to pay just one employee $100M in bonuses and not blink an eyelid.

For them it’s normal because they deal in percentages and large numbers every day. It’s only a tiny, tiny percentage but it’s a tiny, tiny percentage of a huge, huge  number of all your dollars. You all won’t miss it because much of the clipping is not accounted for in your accounts. You’re just given a unit price every quarter, that is after all the clips are taken out.

I’ve not seen any regulations that insist you have a separate investment account within a fund that adheres to full accounting standard and accounts for ALL transactions on your account. That’ll put the cat among the pigeons. Seeing a line item “bonus payment to fund manager Joe Smith” in your account might make you ask some hard questions when you are losing money.

It amazes me that we are forced to give our money to people to invest on our behalf but they do not have to clearly account for all the fees and all charges they are taking out of it, nor do they have to get our approval before they do it.

You agree to a fee but the charges are levied at will and behind the scenes AFTER you give them your money. That’s immoral in my view.

Don’t say individual accounts cannot be done cost effectively. The technology is there for individual investment accounts now. If anything should be regulated it is this. If Citi can afford to pay Andrew Hall $100M as a bonus – not their wage just a year after the worst financial crisis in history, then they can afford to invest in software for individual accounts.

One more thing the regulations should include transportability of your account. Again it can be done. It just takes commitment and someone to work out how to do it.

If you are not happy with your fund manager you should be able to transfer it to another provider at the speed of light. That will force the financial institutions to at least control the release of bonus payments, set aside decent cash reserves and the like if people can transfer out of their funds just as quickly as they can deduct a few cents from a few million accounts without letting you know.

It may result in slower growth and lower returns in good years but it may avoid the boom and bust caused by excessive risk taking and short term bonus payment resulting in your losing 40% of your nest egg.

One Response to “Financial Industry – Bonus Changes and Full Accounting Needed”

  1. DOR says:

    David, Again sincere thanks for such great research and advice. Trust you had a good break. I have a query! Some time ago you mentioned a publication called “Money Morning” and I am unable to find the reference in your archive. Perhaps you could direct me to the article please. Regards from Ireland and again, go raibh mile maith agat. Donal

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