A Conflict of Invested Interest

A number of times each month I receive a few comments, E-Mails and general inquiries from various sources or contacts promoting products, services or websites in an attempt to gain some exposure through TMWTFS. I’m a picky blog owner and content on this sight for the most part needs to be relevant to readers and helpful in advancing the learning of myself and others related to investing and/or personal finance. The majority of the time I decline offers from authors who want me to review a book, review a website or host some sort of paid link for a product that doesn’t directly interest me or readers.

I received an invitation from Larry Elford over the weekend in reference to his website (breachoftrust) and videos created to inform and educate investors about the conflicts of interest that exist within the financial services industry. Although the website is quite crude and a clear work in progress (which Larry will openly acknowledge) I found that his main message is one that deserves attention for new/novice investors seeking or already involved with a financial professional. Every investor will make mistakes and minimizing mistakes over the long-term will lead the majority of investors to higher returns. Informing investors of bad practices, conflicts of interest and dangers in the financial services industry are one of the main motivations for this blog and Larry has an opportunity in this blog post to present some of his ideas and content to my readers.

Larry comes from a career within the financial services industry (former CFP, CIM, FCSI & retired Associate Portfolio Manager), appeared on CTV’s W-FIVE segment titled “Going for Broke” and presented at financial hearings in Ottawa on ABCP in 2008.

Larry’s first video on his website, Ch 1 Beginning, is a good introduction to his stance on professionals within the financial services industry as salespeople rather than advisors and opens the viewer to the tone of his work to bring to attention the issues investors encounter with what is motivating the managers of their portfolios and investments.

When I asked Larry what comment(s) he would like to contribute to this post he replied with the following content:

"The person claiming to be a trusted ‘advisor’ and who is helping you with investment advice is more likely to be looking out for his or her commission interests than your financial benefit. I say that with 30 years of experience, and with sales figures from the investment industry to back this up. To take this one step further, it must be noted that up until Sept 29, 2009, all 130,000 persons registered in Canada to sell stocks and mutual funds (with provincial securities commissions) were licensed officially in the category of ‘salesperson’. It is only after Sept 29, 2009 that this word, ‘salesperson’ was eliminated from securities acts in 13 provinces and territories. (This was not done in an effort to protect and serve the public interest)


Under the new National Instrument 31-103 as of September 28, 2009, mutual fund representatives, formerly called ‘salespersons’, are now called mutual fund ‘dealing representatives’ and individuals who were an advisor under a portfolio manager are now called an advising representative.


Many feel that the previous title was more descriptive of their behaviour. To be sure, the title salesperson wasn’t normally on their business cards. No matter what the title, these folks were paid lucrative sales commissions for selling you mutual funds and keeping you invested."

Larry went on to provide a number of resources to support his stance such as www.investorvoice.ca and books written by John Lawrence Reynolds (Free Rider & The Naked Investor).

I won’t endorse or support any or all of Larry Elford’s comments or beliefs in any of this content but for new investors it’s important to understand where conflicts of interest exist, why they exist and what you can do to inform yourself before errors are made. At the end of the day your money is exactly that; your money. The best person to ever manage that money will be you and choosing the best advisor, financial professional or approach to DIY investing is a major step in managing your own finances and wealth.

Of course for an investor who wants to take advantage of these clear conflicts of interests and unfortunate profiting at the expense of naive investors you can always invest directly in these companies and benefit from the dividends they pay.



* I was not compensated for this post or mentioning of any content and have no financial interest in the content mentioned. *




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Dividend Investing at its Best

With all the negative attention the stock market has received over the past 24 months its easy for investors to get itchy waiting for turbulence and fear to take hold once again.

For the majority of 2010 all I've done is dividend investing at its best: dollar cost average (DCA) into my existing portfolio of high quality dividend stocks with cash, my line of credit and proceeds from the sale of portions of my portfolio as stocks move above and below my targeted allocations.

Dividend investing is supposed to be boring, infact super boring, and this is why the approach is so effective for investors who know how to construct a portfolio, maintain that portfolio and build its equity over a period of time.  Dividends paid in tax efficient cash each quarter are put towards buying more shares of underweighted stock positions fueling more dividends in future quarters slowing gaining ground one share at a time.

This economic environment is where investing is tough psychologically because each investor feels like they should be doing more; buying, selling or tinking with their portfolio.  This is the unavoidable evil within each investor because we're so accustomed to change in our everyday lives.  Investors tamper far too often with a portfolio that works over the long-term but doesn't demonstrate immediate results over the short-term.  When you tamper by selling, switching or repositioning a portfolio/stock you're reducing the effectiveness of your portfolio to achieve success in the future.  The intended turnover makes an investor feel as if they're being productive but what they're actually doing is taking away from their future earning power by not allowing a stock and/or portfolio to compound adequately.

These periods are the periods in the economic cycle where investors, IMO, are most productive.  You can buy stocks cheap but maintaining a portfolio is more than just knowing when to buy or sell and when to allow an investing thesis work how its intended to.  These are times when an investor sticks to their plan and profits from patience.

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My Economic Impact from the HST

On July 1st Ontario's version of the Harmonized Sales Tax (HST) will come into effect adding an additional 8% tax hit to products and services.  Like most Ontario residents I'm not excited about this additional cost that will be placed on simple items such as gasoline, utilities and services I use.  As a respectable taxpayer I take it in stride and wonder how the effect will really translate to the economy, investing and my own pocket.

I understand the "inefficiencies" that the government quotes knowing that these politicians really don't understand what they're talking about by quoting research that suggests a specific number of jobs being created by the new HST.  If we asked them where the jobs will be created and they avoid, deflect and change the subject because they really don't know.  It sounds all good that businesses will save money and pass along the savings but they won't really and I think most consumers and investors understand this.

The mutual fund industry is a perfect example; any savings in efficiency won't be passed along to the individual investor.  Likewise consumers won't see a drop in the utilities rates, prices at the pump or for services from lawyers, contractors and other trade work.  Businesses might initially reduce prices to attract business but tracking the savings being passed along will be difficult if not futile because of the reluctance of businesses to save the consumer some money.

I freely admit that the additional cost that we'll experience in our monthly spending will have a direct result on how much I save & spend.  The effect will be measureable (about 4.5% of my monthly budget) and enough that it will affects our savings rate accordingly.  We still save about 15% of our income at present but that's down from the nearly 20% average over the past 12 months.

Eventually consumers and businesses will adjust and the government will benefit from the additional revenue but the effect on an economy, housing market and employment likely will be measured over the next 12 months.

Consumers will continue to spend on discretionary items but I have to wonder how much the savings rate of the general family will be affected since savings rates have recently been at very low historical levels.  The absence of any incentive for Ontario families to save and instead receive cheques in the mail (our own money) tells me the government really dropped the ball on an opportunity to introduce some meaningful program(s) to help families adjust to the current change in their financial landscape.

British Petroleum (BP): Value Investment or Value Trap?

I'm sure this isn't a new topic among financial authors, bloggers and investors but over the weekend I couldn't help but want to express my...how should I say it...utter disgust with how British Petroleum (BP), in all levels, has handled the Deep Water incident since news broke back on April 20th.

As a value investor I'm inclined to look at stocks that are cheap, out of favour and without bright prospects because of bad news, poor earnings or other qualitative factors that don't directly affect the earnings potential or instrinsic value of the company in relation to what I'm paying in the market.

British Petroleum (BP) is currently trading near $34.00 which looks cheap to a lot of investors and it is; but for a reason.  Some investors will trade into this stock hoping for a rise in valuation or to take advantage of what appears to be a high yielding dividend stock in a sector that commonly is referred to having a "license to print money."

I haven't studied this stock intently, have no financial position in the company (I do own shares in Total and Royal Dutch Shell) and don't see myself being interested in this company at any price for a very glaring reason that I don't have any problem acknowledging on this blog.  One of my Value Rules is that a company has to have competent, transparent and value added management which in my opinion BP does not have at this time.  Their current CEO Tony Hayward has made mistake after mistake in not only handling the Deep Water incident but attempting to clarify rescue efforts, deflect blame of the incident and improving the impression of BP amongst investors, the media and population.  It's not working.

When any company encounters difficulties or is at blame for some event, incident or misunderstanding it is management's job to give correct, concise and direct answers to shareholders, its board of directors and the media.  This helps to inform investors of the financial costs the company will encounter associated with fixing a problem, allows the media access to what activities are being done to fix the problem(s) and lets the population at large (consumers) know what the company is actively doing to improve itself and re-develop the trust it had with consumers in the past.

Playing dumb, spending money on public relation campaigns or directly blame/reasoning for events to other external factors that have no implication on the problem at hand today is counter productive.

BP will cut its dividend, will encounter multiple lawsuits and will have a long-term obligation financially to deal with the effects of this disaster.  The scale of it really is something difficult to grasp if you think of the impact today on the economy, ecosystem and oil industry.  There are millions of barrels, litres, gallons or any other measurement of oil pouring from this busted up oil well into the Gulf of Mexico every day, week and month this continues.

If I were an investor in this company I would want BP's CEO fired yesterday and half the board of directors replaced because they haven't fired him already.  I wouldn't want another oil executive promoted to replace him but rather someone who could realistically spell out to investors, the media and public just how bad this incident is and will become; because it is bad and will be worse years from now.

Then I would sell all my shares.

I hope investors in this company and investors looking to invest in this company make a profit because my perception is that the risk far outweighs the potential return for the mess BP is in and currently continues to become entrenched in.  PR isn't a difficult task.  A company like Maple Leaf Foods is a great example after their problems with Listeria in the past few years.  Their CEO admitted publicly that the company "f*cked up bad" and set out a plan publicly that was intended to restore trust in the brand and products it sells to consumers.  There will be a long shadow cast over the company for years because of what happened, but the company continues to operate today which speaks to the skill of its management in handling the crisis.

Value Investment or Value Trap?.....you be the judge but I think it's clear where I stand on BP today.



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