Blessed by the Potato

In the last post we talked about the importance of regulation: to create an environment where a non-expert, without the ability to independently evaluate an expert, can come to trust a complete stranger because of the regulations and mechanisms in place to create and maintain quality and ethics. There are lots of examples of industries and professions with varying degrees of regulation that we can learn from.

Car salesmen are regulated (OMVIC in Ontario). The regulations set some minimum standards for disclosure and how prices can be advertised: it’s not especially strong legislation (for instance, the dealer does not have an obligation to work in the best interest of the customer), but then the general public understands explicitly that the car salesperson sitting across the desk from them is in a sales role. They don’t couch themselves as “transportation advisors”, and if you went to one you would know that they would try to sell you a car (and you would not walk away with a recommendation for a bicycle and transit pass even if those might suit your situation better). They might be able to help you pick a particular car that’s suitable: compact over a truck, but even then you know that if you walk into a Chrysler dealership with a need for something fuel efficient you won’t be driving out in a Prius or Leaf: the best they could do is a 4-cylinder gasser that their dealership sells. To my mind, this is most analogous to the current MFDA designation in the financial sphere, but without the universal, mutual understanding of the sales and commission-driven nature of the role.

Some trade organizations exist more to protect their members and a monopoly than to protect consumers and build trust with the public. Since it’s been a while since I’ve done so, let’s pick on realtors: there are minimal barriers to entry, and no formalized processes to manage conflicts-of-interest (except for those set up at individual brokerage offices). There is a dispute mechanism, but from casually looking at cases and allegations, they seem to take realtor-on-realtor aggro way more seriously than allegations of misleading or mistreating the lay public. In other words, CREA/TREB is not a model I would want to copy: the initial quality standard is not rigourous, there’s no continuous improvement, there’s next to no policing or efforts to maintain the public trust: it appears to be a trade organization out to serve its own interests.

In cases where the decisions are literally life-or-death the regulatory body tends to take a more active role. Medical physicists for instance are responsible for calculating radiation doses in cancer therapy and ensuring that the machines are accurately delivering the doses prescribed. Over-dosing can kill through radiation effects, underdosing can allow cancer to proliferate. The Canadian College of Physicists in Medicine requires a graduate degree in one of several related fields, a fellowship program (education), examination, continuing education, periodic re-certification, and practice reviews.

Banking, at least the deposit-taking part, is a highly regulated industry. Not just anyone can rent out a space with marble pillars and a vault and call themselves a bank. Because trust is essential to preventing a run on the banks, a government-backed insurance scheme (CDIC) is in place to guarantee that if all of the regulations and oversight somehow still manages to fail, depositors will get their money back (up to a limit of $100,000 per account). Now, that’s not to say that a bank won’t ding you with service charges or sell you services you don’t need — they walk a fine but well-defined line of trust and conflicting interests for sales.

Franchises are not something handed down by the government or enshrined in law, yet by building strong brands people know that stopping at McDonald’s or Subway for a meal will provide a fairly uniform meal experience — they can trust that even in a strange city far from home that they’re going to get what they expect. It’s a way of accomplishing the end goal of letting someone with no easy way of independently evaluating quality to walk in off the street and know that they’ll be in good hands.

So what would I like to see? I think good regulation will be stronger and faster* than building up a brand/franchise, though the end result might be better that way as an organization shooting for excellence doesn’t have to play to the lowest common denominator. Either way, I think getting rid of embedded commissions and their inherent conflicts-of-interest and obfuscation is the first step: it’s an uphill battle for education and standards if that basic component of the business model isn’t fixed first. We could follow the UK and Australia in that direction, and it will be interesting to see how their experience plays out over the next few years.

Either way, training and examination requirements at the start, including an ability to explain how fees work, the impact of fees, cash flow planning, and managing behavioural issues. Explaining risk at some level is necessary but is tough because even experts have trouble defining it precisely — perhaps just understanding that there are aspects of risk. Levels or specializations of certification, and an understanding that some situations should be kicked up the chain. Re-examination, auditing of practices, and other systems to keep quality high. And a correction mechanism: some way to feed back new or unresolved problems back through continuing education, to arbitrate disputes, and compensate customers who were wronged.

The regulatory body should ideally be separated from the body that looks to maintain a monopoly or promote the profession so that it can be client-serving and not self-serving. Because it can be confusing as to what the responsibilities of the advisor are (especially if a term like “advisor” is used), someone (who?) should make it clear to the public what the relationship is, possibly disclosed up front (“Hi, I’m a salesperson and I do not have a responsibility to do what’s best for you, just to make my commission and not recommend something egregiously bad. Let’s look at a 7-seater, shall we?”).

Unfortunately I still haven’t had a chance to read the private member’s bill in Ontario so this might all be covered already.

* – from implementation to helping people. It will likely be slower to be crafted and passed in the first place.

A little while ago a social media guru in our pubic affairs team said that you had to maintain a “presence” on Twitter by posting at least three times a day. We just wanted a place for people to get updates on a new project, which with lecture announcements might mean one quantum of content per month.

John Scalzi said that he was culling his follow list by removing the people who rarely tweeted.

I don’t get it. I check my Twitter feed about once a day, and though I only follow 36 people my screen is always full. Those accounts are carefully curated so that I usually want to read to the end of a day’s updates — but the general signal-to-noise on Twitter is atrocious. What finally got me to write this rant was friend of the blog @barrychoi tweeting about a new post on his blog eleven times in a single day! When people have really active Twitter accounts, especially with high levels of noise (like live-tweeting just about anything in depth, or just seeing half a conversation) it really turns me off. Following a couple dozen accounts like that and unless I just camped on the Twitter app I would start missing content — even at a miserly 140 characters the tweets add up.

And maybe that’s the problem: so many people are so swamped by the uproarious nature that they just sample their Twitstream at random intervals, which forces people to re-post their tweets again and again hoping to catch the eyeballs of their so-called subscribers, which exacerbates the high noise level. Ugh, that’s just not a game I can play.

Maybe it’s because I use the default web-based interface rather than a 3rd-party app with more capabilities (i.e., doing it wrong). I believe the way people use Twitter is to politely follow anyone who follows them first, then mute them with the list functions of the 3rd-party apps. Or else there’s something I’m just not understanding about the whole thing — which is likely given how incredibly difficult I find expressing anything in 140 characters. Seriously, my whole stream is basically poor-man’s-RSS announcement of new posts, and tweets full of [1/3] multipart markers.

As long as I’m ranting: hashtags are really annoying. When used sparingly they can be used to tag tweets, particularly when trying to tag that tweet to something in particular that might not show up in a general search (such as #becausemoney for questions and commentary directed at the podcast). But just adding the symbol in the middle of a sentence makes it harder to read and doesn’t help at all with the intended function — no one is out there searching for highly generic terms like #money or #Canada… and if those words were in the tweet anyway a search would pull them out without wasting a character and reducing readability. Without careful, conscious application, hashtags just become more noise. Oh, and “via” means “by way of; by means of” and is usually used to indicate who sent you a link you’re passing along to your followers — putting via [yourself] is like talking about yourself in the third person, it’s weird and off-putting.

CBC Marketplace recently ran an episode looking at financial “advisors”, sending a woman in to several with money to invest and a hidden camera that has made some waves. Some advisors were ok (which of course didn’t air), but there were some that were just atrocious. They provided shockingly bad advice, or couldn’t answer simple questions about how much they were paid and what fees would be.

I don’t know how the advisors were selected: the show gave the appearance of picking randomly from large firms, but they may have been tipped off about bad ones in advance. The industry has tried to couch this as just a case of running into a few bad apples, but as Sandi says, that’s a load of bull and lets them continue to get away with a broken model for the industry. Some of them were so bad that a bad apple metaphor doesn’t cut it, but rather one with a grenade in it. That should never have happened.

Yet such incredibly bad advice is not so unusual — the system and the major firms do not set a high bar for financial advice.

This is a major issue. Financial advice/planning has a large impact on people’s lives, yet conflicts of interest abound and problems take years to show up. Moreover, people who need advice largely do not have the ability to evaluate the quality of their advisors (even with the benefit of hindsight), so recommendations from friends are basically useless. Combine all that with hidden and confusing fees, and this is an industry that cries out for regulation. A we-can-do-better retreat and voluntary code of conduct is not going to cut it.

Regulation can come in many forms: the government can step in to regulate from the top down, or industry groups can self-regulate. Often a hybrid emerges, where the government will help legally protect a professional title, and members of that organization will self-regulate.

Right now, the conflicts of interest inherent to the existing salescritter-cum-advisor model are making it to the public consciousness. That erodes trust in the whole system, yet there’s very little in place to replace it.

Here is the central issue as I see it: the system needs to be reformed so that someone with no knowledge and no way to evaluate quality in advance can go to get advice from someone and trust in that advice (and get reasonable value for the fees that they pay while they’re at it). And really the best way to build trust for the lay public is to have a trustworthy expert give the thumbs-up — that is, regulation.

What does good regulation look like? There’s some kind¹ of quality standard set, with a mechanism to get it there in the first place (training, examinations). There’s a mechanism to maintain quality, through reducing conflicts-of-interest; ongoing training and continuing education; ongoing oversight, evaluation, and auditing; and even formalized specializations. And a way to make things right when the few bad apples inevitably get in: dispute resolution mechanisms, compensation funds. In return, a profession gets formalized and protected credentials and naming rights. Culture is important: a focus on ethics and client needs, on openness and honesty.

Not every element is required there. And government isn’t necessarily required: creating a brand that people can trust can also work. That can be a faster approach to get started, but doesn’t carry as much weight without the government behind it. In the next post I’ll look at some examples of professions that are out there now and how they are regulated. In the meantime, check out this week’s BecauseMoney podcast where I discussed this issue with hosts Sandi Martin, Jackson Middleton, and special guest Noel D’Souza.

1- actually the quality standard itself is important too — it should serve the right people (i.e. the public rather than the banks), have associated metrics, be achievable, consider structural issues and conflicts-of-interest, etc.

Many people don’t believe in index investing, looking instead for ways to beat the market and eke out those last few percentage points of return.

I get it: index investing is an absurd concept. Most popular indexes were never intended to be investment products: they were simply a way to try to get an average figure for the stock market so journalists could succinctly report what was happening on Wall/Bay St. when filling the paper and TV screens with non-actionable noise (…I mean news). That such an arbitrary collection of companies should end up being the most highly recommended way to invest seems to stretch credibility.

“Surely,” the argument goes, “out of 500-some companies I can find 10 that are obviously going to do worse than the average and exclude them, and find 10 that are obviously going to out-perform and over-weight those, and then I’ll out-perform indexing.” And I don’t know — maybe you can. But likely not, at least not without so much work (or paying someone else to put in the work) that the costs undermine the gains. And if you can maybe get the extreme outliers, the temptation is to keep going with the tweaking until long past the point where any move you make is more likely to be wrong than right. It’s a losers’ game.

Still, the mind rebels against the concept.It can’t be that indexing works, after all, there’s a whole profession created around the idea of investing through active management. If the argument that the active investors are the market — so the average active investor gets the average market return less fees — were true then a whole industry by rights should not exist. But it does, therefore there must be something better than active investing, QED. The studies exist though: the best data is on mutual funds, which by a very large margin do not beat their indexes net of fees.

Of course, we live in a crazy, irrational world. The lure of the possibility of doing better (and rubbing your peers’ noses in it), of finding that fund manager who’s secretly the next Buffett, Lynch, or Soros is irresistible to many. We’ve all heard of those guys who made it big by just having the right idea at the right time — whether it was a tech company, a mining stock, or shorting the housing market — and we’ve all got ideas of our own. We’re greedy, and there’s a driving need to be better, even if it means taking risks to get there. Setting out to be average is a tough nut to swallow, even if doing so actually makes you an above-average investor who can more easily avoid the emotional foibles of the masses.

Or maybe your salescritter moves the goalposts and instead of promising better returns instead breaks out language regarding absolute returns or lower volatility. That can be shockingly persuasive: even though human drivers can make all kinds of deadly errors, nobody wants a robot car on the road. The thought that some human agency is driving your portfolio — even if they’re driving it into the ground — can seem more reassuring than the thought that you have turned everything over to a passive sampling of global capitalism.

And even when you’ve heard about how “fees matter”, the fees sound so very small — single-digit percentages or even “basis points” — that it’s hard to believe the effect is so profound. Surely paying 1% to this really smart-sounding guy will be worth it when he out-performs, right? It was to the people who invested five years ago…

Yes, past performance is no guarantee of future results, but — aha! — doesn’t that also apply to index investing being the way to go? And looking at past results is so important as it’s one of the few pieces of data accessible, and we have to look at something — investing should be work. That’s a law of nature or something, right? No: it’s hard to accept, but making things easy and uncomplicated is a virtue. If it makes it easier to stick to your plan and not panic or screw things up through human error, then that’s a further way that indexing is a good approach to take (and to recommend). Rather than procrastinating on a hard method that’s likely going to underperform, it’s really easy — and satisfying — to push someone just getting started towards indexing.

Then, after all the absurdities and cognitive biases have been stripped away, you see that indexing isn’t quite so absurd after all. A cap-weighted index minimizes the amount of rebalancing that has to happen on an ongoing basis as valuations fluctuate. Big indexes are well-diversified, and even if they were meant for reporting more than buying, they work quite well if there’s some scale involved (which Vanguard, Horizon, BMO, TD, Tangerine, or iShares can easily provide). Because there’s nothing else to compete on (the vendors want to track the same thing as closely as possible) the fees get cut as close to zero as possible.

Even after accepting that indexing is the way to go, that urge to outperform and make it into work can remain. We all know someone who uses ETFs to invest, but is not in any sense a passive index investor. They may try to time the market, or just over-fit their asset allocation model, digging up ever more specific sector and individual country funds to own, with their portfolio allocated down to fractions of a percent. There are some who acknowledge the happenstance origins of indexing, and who try to create better indexes (fundamental, value-tilted, etc.) that still embrace the core principles of broad diversification and fee minimization.

Though no matter what path led to the indexes we have, in the end it’s the best strategy available for the vast majority of people investing for the long run.

This has been an absolutely awful winter for much of North America. Unrelenting cold — actually, it relented on Tuesday but one day of relenting is still craptacular — snow that just piles up and up and up, broken only by the ice falls. You can blame random fluctuations and poor luck in weather, shifts in the climate from global weirding, but we all know the answer: the Polar Vortex. But what can we blame the Polar Vortex on? Simple:

The Obstinate policy of the Coca-Cola Company of Canada to deny Cherry Coke Zero to Canadians.

You may recall in my last plea to the company that I pointed out how they were exploiting Canadian icons (polar bears, Santa, happiness) — that Canada was their muse, and yet we were getting the short shrift on flavour selection. I took a carrot and stick approach: I asked very nicely for them to bring Cherry Coke Zero to Canada, with a promise to buy a lot of it if they did, and backed that with a threat to unleash a progression of plagues: memes, cats, and ultimately polar bears.

Now it turns out it’s really difficult to arrange for the release of polar bears with the explicit purpose of setting them loose upon downtown Toronto to terrorize the regional executives of a certain global beverage company. I mean, the paperwork is just the beginning: you have to wait for a slot in front of the Zoo’s board of director’s semi-annual meeting to pitch your case, and of course really the only approach is to use my scientist credentials to call it a research project, so that means I have to apply for a grant and ethics approval, which is another two-year-long timeline. I mean, at that point infiltrating my way into Coke’s ranks, working my way up the corporate ladder, and just making the decision myself is starting to sound easier.

So I kind of let the project slide for a little while.

Then the Olympic messaging started up, and I realized: we are winter. Right after that moment of clarity the ice storm hit and I was without power for 7 days — over Christmas. Santa saw I was in a funk and stopped by to have a good chat about the whole ordeal, and I mentioned that what would really cheer me up is a Cherry Coke Zero. The mad plan came together in that instant: rather than polar bears, Santa would use his Christmas Winter Miracle Weather Machine (CWMWM) to help his fellow Canadians put a little pressure on the company. And thus, the Polar Vortex. He even managed to send snow all the way south to head office in Atlanta.

For three months the Polar Vortex has raged and blown and blustered, freezing innocent and culpable alike.

It’s time for spring, Coke. But Santa won’t relent until all Canadians — from Windsor to the Workshop at the North Pole — can enjoy Cherry Coke Zero without having to snowshoe down to one of the few Freestyle machines sprinkled around or smuggle one across the border. George RR Martin has given us a glimpse into a world of winter without end, and it’s not pretty — anyone you get remotely attached to is at constant risk of gruesome death. Don’t take us down that road: be the hero to the people you’ve always wanted to be and bring back spring.

Our first ever cherry-flavoured spring.

#PolarVortex
#CherrySpring