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Things I Worry About

Maybe I’m a chronic worrier.  Don’t get me wrong; I think our world, our society, our country and our profession are on a long positive trajectory, and that we are better off in just about every way than we were 20, 30, 50, 100 or 200 years ago.  But there are short-term challenges at every turn that have caused pain and harm—and I think most of them, in retrospect, could have been mitigated or avoided altogether.

So what worries can’t I get out of my mind?  The first is ETFs.  It’s actually very simple: you have products that are required to hold assets in proportion to their index.  In a market downturn, when there will be redemptions, they have to liquidate.  That means they have to sell some of those stocks or bonds, in very strict proportion—pretty much at any price.

We appear to be rapidly approaching untested waters with these vehicles.  The large ETFs have never faced significant redemptions before, and I honestly don’t see how they would be able to navigate such an environment.  They make up such a large part of the market, and their liquidations would all come at the same time—meaning they wouldn’t be able to sell to each other.  Who would be the buyers of last resort?  The actively managed funds are the obvious answer, but they, too, would be in a redemption mode during a serious market downturn.  I would guess that some of the very best active managers are building up cash to buy at a discount when the inevitable happens, but they will demand bargain prices and be able to wait patiently for panic selling.

A market where there are very large indiscriminate sellers (that is, who have to sell no matter the price) and no obvious buyers suggests to me that the index ETFs are going to drop farther and faster than anybody seems to expect.  That, of course, would trigger more redemptions in a downward spiral that doesn’t seem to have an obvious bottom.  I know there WILL be a bottom, but it could be lower than anybody realizes, not because stocks will suddenly become dramatically less valuable, but simply due to the mechanics of today’s investment marketplace.

What else worries me?  After the big brokerage firms—with generous help from mortgage lenders and the rating agencies—nearly blew up the global economy back in 2008, I actually believed that Congress and the regulators would understand that the incentive structure on Wall Street is extremely dangerous.  “Feed the pig,” was the slogan of the day, meaning if there is a demand for something, regardless of whether it was viable, then we gather up as much of it as we can (“we’ll buy whatever crappy mortgages you can manage to write”) and sell it at a markup—to the hungry pigs who are waiting eagerly at the trough.  Heck, we’ll even allow hedge funds to structure the kind of product they want to bet against, and then sell it to unsuspecting institutional investors.

This incentive structure, plus a tacit guarantee (“too big to fail”) that any major losses will be underwritten by taxpayers, is still with us.  Yes, lending institutions have to maintain less risky balance sheets, but I have zero confidence that there is strict oversight on how those balance sheets are valued, and I would bet all the money in my pocket that there is a brisk trade in derivatives or other highly-leveraged bets that the regulators are unaware of, off the balance sheet, in subsidiaries, or elsewhere where Wall Street can hide them from the regulators.  And I also believe that there are hedge funds making enormous bets with high leverage, which will eventually implode, probably all at the same time.

So I worry that the next market plunge, which already could be worse than the underlying economics might indicate, will be further fueled by unknown but powerful Wall Street shenanigans—and once again these might threaten our whole capitalist structure.

Isn’t that enough to worry about?  Maybe, but I also see a disturbing trend among the regulators, which causes me to feel concern (and sympathy) regarding future financial planning professionals.  The regulatory trajectory has been to create more and more rules, and more and more oversight—and if any of this actually related to preventing fraud, I might be a supporter.  But instead, the regulatory organizations seem to be straying into increasingly arcane areas where they can justify their existence at the expense of the operational efficiency of a profession whose entire mission is to benefit the public.  Can this possibly be making the world a better (or safer) place?

The large brokerage firms have the scale and resources to hire professionals directly from the regulatory agencies to handle the increasing paperwork load, and to smooth over any discrepancies between arcane rules and actual practice.  The small business planning firms, meanwhile, are inconvenienced to the point where it impacts on their ability to serve their clients, tipping the playing field further and further as the regulators become bolder and bolder.

And I don’t see anybody calling into question whether this or that new initiative, or intrusive on-site audit, is actually protecting consumers.  Ideally, ‘protecting the public’ would be the only reasonable justification for any regulatory initiative, and I just don’t see that standard being applied.  Anywhere.  In fact, I feel like we are straying from it.

Anything else?  In general, I think the financial planning profession is becoming more professional, with more advisors being credentialed (CFP, PFS, CFA), more being college graduates, more being fee-only, more straying from the AUM revenue model.  But I also worry about more advisory firms being rolled up into public companies or purchased by private equity—and thereby diluting their allegiance to protecting the best interests of clients.  It’s a trend away from professionalism if we define professionalism the way doctors, accountants and lawyers do.  Each of them have rules about outside ownership of their firms—and financial planners currently do not.  If too many firms are owned by non-planning professionals, I worry that the horse will be out of the barn before we get around to closing the door.

Finally, I worry about my own corner of the profession.  It seems to me that the industry magazines and online publications are straying further and further from what I had always assumed their primary function to be: providing a long-term perspective on where things are going and best practices emerging in the marketplace.  More and more I read breathless coverage of how this or that broker-dealer managed to recruit this or that billion-dollar office, or this private equity firm is moving into our space.  Over time I’ve begun to look around and identify the thought leaders who are helping all of us think through the next challenges, the new best practices, the new emergent tools—and I see a diminishing cohort.

And it isn’t just the magazines.  When I attend conferences, increasingly I see a representative from one of the exhibit hall vendors up on the podium delivering an unvetted sales pitch, and an audience snoozing through a sales presentation that somehow manages to give them CE credits.  I worry that critical thinking and thought leadership is being allowed to slip away, and nobody is paying attention.

As I said, if you look at things from a long-enough-term perspective, the world seems to be getting better—despite some obvious short-term setbacks which I believe are simply bumps on the road to better things.  What worries me is that the bumps will be harder and more potentially damaging than they need to be—and I wish more people in the profession, and in authority, were paying attention.