February 2016

CFALA e-Newsletter: February 2016

Welcome to the CFALA e-newsletter, a periodic publication with stories about noteworthy events and programs sponsored or hosted by the society, guest articles by members, book reviews, and other items of interest to CFALA members. Click on the headlines below to read the full stories. And if you’d like to contribute a story suggestion or, even better, write an article, we’d love to hear from you. Please email Executive Director Laura Carney at laura@cfala.org.

*Please note that the content of this e-newsletter should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of  CFA Society Los Angeles.

In this issue ...

CFA Institute Launches Global Brand Campaign

CFA Los Angeles is pleased to share with you the launch of A Difference That Matters, a global advertising campaign designed to drive greater awareness among industry firms and investors about the importance of hiring the most rigorously trained and proven investment professionals, namely CFA charterholders.
At the end of February, the campaign will launch in print, digital, outdoor (billboards), and social media promotions across the United States, Canada, United Kingdom, China, and India. It will integrate the programming and initiatives that we are already planning for, including Putting Investors First Month. To learn more about the brand campaign, watch this video from Chief Marketing Officer Joe Clift.

More Than You Wanted to Know: The Failure of Mandated Disclosure by Omri Ben-Shahar and Carl E. Schneider – A Book Review

“For more than forty years, I’ve studied the documents that public companies file. Too often, I’ve been unable to decipher just what is being said or, worse yet, had to conclude that nothing was being said.” - Warren Buffett
As the regulatory environment for the investment industry encounters increasing pressure to “protect” individual investors, regulators and political players, at least one common channel is to turn up the dial on rules and regulations. More specifically, they also add and/or enhance mandated disclosures. It seems appropriate in this situation to ask (at least) two questions. Namely,

  1. What criteria should we use to evaluate the success of required disclosures, and, more importantly;
  2. Are the disclosures helping individuals make better decisions?

Omri Ben-Shahar and Carl E. Schneider tackle these questions (and more) in their book. Their overwhelming conclusion is that mandated disclosures do not achieve the intended purpose.

There are three sections to the book.

  • The first section (chapters 1 through 3) provides an overview of disclosures, how significant they have become, the complexity of the issue, and an overview of how they are failing.
  • The second section (chapters 4 through 7) cites a number of specific studies and details voluminous instances where and how mandated disclosures fail to achieve their intended purpose.
  • The third section (chapters 8 through 12) addresses the question of whether mandated disclosures can be saved, and if so, how. The authors’ conclusion is that they cannot be saved, and they provide additional examples where such disclosures do more harm than good.

The book begins by suggesting that mandated disclosures are alluring because they emerge from a couple of primary ideologies. First, the principle that in a free-market system, markets work best when buyers make informed decisions. Second, people are entitled to make their own decisions.
The problem emerges from the fact that mandated disclosures are relatively appealing for legislators who wish to demonstrate actions by enacting laws to “protect” us. Combine that with the fact that disclosure failures are little noticed and typically soothingly explained away by “disclosurites” (the term that the authors use to describe those who firmly embrace the value of mandated disclosures). Finally, even if they do little evident good, the typical argument is that they do little obvious harm.
The interesting direction taken in the initial section asks that we shift perspective from discloser to disclosee. They then provide examples where “people are crucially less enthusiastic about making decisions – and making them in the disclosurite way – than disclosurism assumes. In short, disclosures must at every stage overcome the resistance of their audience.” The authors argue this shift of focus from regulatory intent to recipient reality is indeed a better way to evaluate the intent versus the result of mandated disclosures.
Section 2 references the burdens mandated disclosures impose on those they are intended to help. Statistics cited include demographic data about our population’s ability to read (and understand) disclosures, indicating that forty million adults are functionally illiterate and fifty million are only marginally literate. Further, a basic numeracy study is cited in which only 16% of participants could answer three simple questions such as how much is 1 percent of $1,000. Yet they note financial disclosures and medical privacy notices are generally written at a college level.
Additionally, reasonable questions are raised about the “overload” or “quantity” issue as a deterrent to the disclosures even being read much less actively incorporated in decisions. For example,

  • How often do you fully read all of the terms and conditions on a website before you check the “I accept” box and move ahead using the software/program?
  • How about when you last purchased real estate. Did you thoroughly read all of the documents that were provided to you at closing before signing?

Chapter 7 references the psychology of how we make decisions (behavioral finance). They cite a number of reminders that individual decisions are relevant to evaluating how mandated disclosures fit into our mental processing. For those familiar with the categories, anchoring, framing, loss aversion, intuitive versus analytical decision processes, and errors in risk assessment are all reviewed.
The authors note that while it is typical for people to make decisions using an intuitive process (i.e., “system 1” thinking), disclosures typically provide information and quantitative details which seem more suited to analytical processing (i.e., “system 2” thinking).
The authors cite the Thaler/Sunstein concept of designing information presentation and decision processes that can nudge people to make what is deemed to be the right decisions (usually), but imply this is more a structure of content to counter individual bias issue than support for the value of mandated disclosures.
The final section tackles the idea that simplification would be helpful, but they conclude that “Simplicity’s failure grows out of mandated disclosure’s concern with complex and unfamiliar issues. Complexity can rarely be described simply to people unfamiliar with it.”
Chapter 11 provides examples where individuals are harmed by mandated disclosures. They cite an example in which a bank solicits the refinance of an existing loan. The ultimate effect was a dramatic increase in interest and fees. The lawsuit filed was initially unsuccessful because the bank claimed compliance with the mandated disclosure law. Additionally, as we in the industry know, mandated disclosures bring additional costs which ultimately are (to some degree) borne by consumers.
The authors conclude that this book was written to persuade lawmakers not to use a failed regulatory method. They also suggest that the question of what should “replace” mandated disclosures is the wrong question. Specifically, the primary fault is that this method has been asked to do things it simply cannot achieve. Simply put, mandated disclosures are a panacea – and – if they don’t work, should be replaced by something else.
In this regard, recall the physician’s historical panacea of bloodletting. For two thousand years, this process was used on patients. When its failures became clear, most of the ailments it was used to treat could not be cured. That was, however, no argument for persisting in bloodletting. So it is with mandated disclosures.
“The definition of insanity is doing the same thing over and over again, but expecting different results.” Attributed to Albert Einstein
By Mark Harbour, CPA, CFA, CIMA®

Roundtable Discussion of Department of Labor's Fiduciary Duty Proposal

As industry participants you are probably well aware of the Department of Labor’s pending rule on fiduciary duty. If not, you should be.
This will have a significant impact on some of the business models of our members, in particular the broker-dealer model.
The rule would require those providing investment advice to retirement plans and IRA account holders under ERISA to act in their client's’ best interest. In other words they will be held to the “fiduciary” standard. Broker-dealers and others not already acting under a fiduciary duty are currently only held to a “suitability” standard. This does not require them to put the client's’ interest above their own.
Shouldn’t all investment professionals put their clients’ interests first? That is a question for you to consider. It certainly is not the current case. And even if the proposal is adopted, it will only affect pension and IRA portfolios. Professionals that do not work for a Registered Investment Advisor (RIA) would still be able to function under the “suitability” standard for non-retirement accounts.
This is a polarizing issue with strong feelings on both sides. The CFA Institute is generally supportive of the proposal but has some qualifiers.
The link below will take you to a recording of a panel discussion held at the CFA Society of Washington D.C. on January 28, 2016. The panelists debate the DOL’s proposal so you can see it from various sides.
DOL’s Rule on Fiduciary Duty Link
We urge you to watch and become more familiar with this important issue. And as always, please send any comments to your Advocacy & Ethics Committee at advocacy@cfala.org.
By Dan Pomerantz, CFA, Chair of the Advocacy & Ethics Committee

 

Five Reasons to Start Your Own Firm and Four Steps to Take to Do It

In this Enterprising Investor blog post, Sameer Somal, CFA, shares some of the insights he's gained in the two years leading up to and the two years following his co-founding of Blue Ocean Global Wealth. Somal discusses demographic and other environmental factors supporting such a move, and provides a framework that you can use as you consider starting your own firm. Read more... 

Swedroe: Scoring 2015’s ‘Sure Things’

In this ETF.com blog post, author and BAM Alliance principal and director of research Larry Swedroe provides an assessment of how his annual list of financial market "sure things" fared for 2015. The list is an informal distillation of impressions that Swedroe has gathered from interactions with financial advisors and the financial media at the start of every year since 2010. We've also provided a link to Swedroe's 2016 list, published on 1/16/2016, for those who might be interested. Read more... And more...  

Which Are the World's Most Influential Languages?

What makes a language influential and how can its global importance be measured? Check out this World Economic Forum post by writer and social media producer Donald Armbrecht, who summarizes findings of an interesting study that aims to answer these questions with the use of network science. According to the study's authors, including cognitive research scientist and linguist Steven Pinker, it is the degree of connection that a language has with other languages that determines its global influence.  Read more... And more...      

What Is the Future of Global Finance?

In this World Economic Forum post, senior writer Keith Breene takes the pulse of what’s happening in finance around the world. He also shares links to two televised sessions about the future of the global economy. The “Transformation of Finance” session features Christine Lagarde, Managing Director of the International Monetary Fund. Read more... And more... 

What Is the Future of Global Finance? (continued)

The “How to Reboot the Global Economy” session features Nobel Prize-winning economist Joseph E. Stiglitz.  Read more... 

Dee-1: Sallie Mae Back

"After making the minimum payment on his loans each month . . . [New Orleans rapper] Dee-1 signed a record deal and decided to use a chunk of his money to completely pay Sallie Mae back. Then he made this video . . ." Read more... And more... 

 

 

 

 

 

 

 

 

 

 

 

 

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