The current gatherings of anti-Wall Street protestors seem like amorphous groups, but the protests center around a variety of issues related to financial insecurity. According to the protestors, every class strata, with the obvious exception, is financially stressed and their losses in home equity and market portfolios will take years to recover.
Consider that the Republican Party is openly advancing the cause of the top 1% of the U.S. population (about 345,000 people) at the expense of 350 million Americans. It’s amazing what money can buy.
While the protestors have identified the problem of lobbyist power and poor democratic representation, the protestors also may be re-igniting a fire under the need for financial reform, which has stalled in the past year, and now shows signs of celebrating a Phoenix-like rebirth.
This is welcome news, especially since the financial services industry has acted like it sees, smells and knows nothing about what is transpiring in the marketplace. As a result, it has largely evaded the waves of consumerism which swept through the U.S. in the Sixties. When it did occur, in the last waves of legislation in the 1930s, financial reform was so highly managed that it became a legal goldmine for securities lawyers to write and interpret the mountain of regulations it inspired. Today, even the promise of Dodd-Frank has been broken by regulatory slicing and dicing.
While it has yet to be articulated, it is no wonder that individual investors now feel victimized by some mutual funds, mortgage companies and credit agencies that have taken control of their abilities to become financially independent.
What people at these gatherings nationwide intuitively understand is that they now face a lower standard of living and lower quality of life, even while after they have they have invested and purchased homes.
The Fund Industry is Playing Ostrich
Yet while the protests continue, fund companies and banks have publicly ignored the public impetus for changing the way they do business or for acknowledging that fund companies should be run for the benefit of their investors, not their salespeople.
After the Lost Decade of investment returns and prospects that the future will produce low returns and more volatility, a few innovative fund companies could gain national recognition by doing the following:
–Adopting new compensation schemes, so portfolio managers only make money when the fund posts a positive return over the most recent quarter. As it is today, portfolio managers make money all the time, in declining and advancing markets, while investors take all the risk, suffer the drawdowns, and pay all the expenses;
–Fund companies have to prove their active management abilities. A recent study by ActiveShare found that one-third of all fund companies’ assets were not actively managed. This means investors were paying for active management, but not getting it; a great example of deceptive advertising and possible fraud.
–Touting the low expenses of ETFs versus mutual funds and why lower expense ratios should become a prime goal of any retirement plan. One reason for the national push by some politicians to privatize retirement plans is that mutual funds have much higher expenses, fees and revenue sharing deals than ETFs. The reason for the privatization push is that low-expense ETFs today only represent about 2% of 401(k) plan assets. Low expenses deprive mutual fund companies of the huge revenues they are seeking by pushing the privatization of retirement plan assets.
That’s just a start for the need to make reforms.
But the problem is that the financial services industry hates change. This is perfectly understandable since all the regulations and revenue streams flow in one direction.
But the current public protests show that something new may be developing. For a few intrepid fund companies which want to capitalize on this new investor awareness, now is the time to take advantage of this trend. If so, fund companies may discover that good corporate governance is good marketing.