In privately owned investment companies, the owners’ personal reputations and interests were intertwined with the funds that they were running; this affected how they handled clients’ interests. With publicly owned fund management and insurance companies, the board and management owes fiduciary responsibility solely to shareholders. The customers (policyholders and fund investors) are mined in the interest of shareholder profit maximization. So you might wonder if a public company is the best structure for insurance and investment management companies looking after your retirement savings?
Public ownership might also explain the massive financial product proliferation and complexity. Examples of financial product ‘innovation’ in the last half century include: mutual funds, reverse mortgages, life settlements, GMWB insurance contracts, structured products with principal protection, universal life policies; these, as the saying goes, are sold not bought.
John Bogle’s take on (financial product) innovation is that innovation in the non-financial world generally means better goods and/or services at better prices, but in the financial services industry almost all innovation is in the interest of the seller!
Vanguard is a client-owned investment management company and it just became the largest U.S. mutual fund manager ($1.3T), primarily on the back of low-cost and indexing, even excluding its ETF business. Vanguard’s growth is fuelled by its low-cost index products, an approach no doubt influenced by being the only mutual investment company in the U.S.
What to do as an individual investor
-Ask for a fiduciary relationship from your financial adviser; -If you’re pitched a product you don’t understand, then don’t buy it; if you are nevertheless persuaded, have it evaluated by an independent fee-only advisor and compared to alternative ways to solve the problem you are trying to address; -Get financially educated and consider building low-cost passive portfolio consistent with your risk tolerance or get a fee-only qualified financial planner to prepare an Investment Policy Statement including a recommended low cost index-based portfolio compatible with your risk tolerance
What government and industry should do
-Fiduciary duty: make acting in the best interest of the client the required standard for all retail transactions claiming they provide financial advice rather than a title that indicates a sales role; move the financial industry from a product sales to a professional services model.
-High fund fees: make low-cost large-scale professionally managed investment vehicles (like CPP/Teachers/etc) accessible for individual retirement accounts to minimize the corrosive effects of investment management fees on individuals’ lifetime of savings.
-Investment and insurance company organization: facilitate/encourage the creation of mutual insurance and investment management companies. This needs to become part of the political agenda.
-Product innovation: introduce longevity insurance products, already available in the U.S., which are pure insurance products without an investment component, whereby each single premium of $1 at age 65 buys you about $0.90/year for life starting at age 85.
-Financial education should be part of the high school curriculum and offered to all as part CPP/OAS preparation
Peter Benedek is a pension activist authors the pro-bono website www.retirementaction.com whose mission is to create an independent network for retirement finance education and advocacy. Topics cover all phases of an individual’s life-cycle from pre-retirement planning to transitioning into retirement and being retirement. He aims to help individuals achieve their retirement objectives as well as advocate for public policy changes that will enhance retirement security. He is a retired Nortel engineer, manager and telecommunications R&D executive. Since he retired he has become a Chartered Financial Analyst. In addition to authoring the website, he also provides research and consulting services to investment management firms.
Keywords: finances, investment