Short Takes #2

1. Rogue Clients

Falling stock prices mean that financial advisors need to beware of lawsuits from “rogue clients” according to Gowlings’ Ellen Bessner in her interview with the Wealthy Boomer (the web page with this article has disappeared since the time of writing). She defines a rogue client as an investor who claims to have a high capacity for risk but says something different when markets decline. I prefer “insurgent clients” or “terrorist clients” to really drive home the imagery. Perhaps the real reason these clients are angry is because various marketing efforts gave them unrealistic expectations about the advisor’s ability to beat the market and protect their portfolios from loss. Just a thought.

2. Bank Prime Rate

The Big Cajun Man added his voice to the many others observing that reductions in the central bank rate are not being fully passed on to borrowers. On one level this makes sense because the banks are recovering from a period where they lent money to borrowers with poor credit at unprofitable interest rates. However, adding a fixed amount to everyone’s interest rate isn’t the answer. Banks need to raise interest rates for borrowers in proportion to how likely they are to default.

3. Bankers’ Bonuses

Larry MacDonald reported that the New York Attorney General told AIG to recover executive bonuses (the web page with this article has disappeared since the time of writing). I agree with Larry that this is a good move. The problem here is that top executives are supposed to run a company for long-term success, but they are compensated for very short-term results. This creates a conflict of interest. We tend to think that these executives must have a weak moral character. But few of us could resist millions of dollars for just doing what everyone else seems to be doing. Perhaps an executive’s bonus for a given year should be paid three years later when the company has a better idea of the value of that executive’s efforts.

4. Active Share

Preet explains the concept of active share, which is a measure of how much a mutual fund differs from its benchmark index. Many mutual funds are “closet indexers” that differ little from the index. Preet goes on to show you how to calculate the effective MER on the active part of a mutual fund.