FAQ #12 How is your ‘WaD dealing with money’ differs from what SRI refers to?

Why and how could the idea of Socially Responsible Investing be expanded?

In previous newsletters and on my old website, I’ve introduced a term: WaD (Wise and Decent) financial dealings, as an attempt to expand what is often described as SRI (Socially Responsible Investing) or CSR (Corporate Social Responsibility) and ESG (Ecological, Social, Governmental) considerations in investing. The key difference is that while SRI, CSR, and ESG refer to ethical or green investing, by the term ‘WaD dealing’ I mean to refer to all aspects of the financial service industry. Gradually, it’s dawning onto ever more people that neglecting what SRI stands for is increasingly untenable and ultimately foolish, but my claim is that focusing only on investing is still not enough. The extra content of WaD dealings is about issues that would also contribute to a healthier and more satisfying future for all, not to mention their more immediate and personal benefits. Clients deserve these, and should demand them. You may ask, ‘Nice, .. what are you talking about?’, … please read on.

1. The common core of SRI and WaD approaches
2. Who are the WaD advisors?
3. Limitations of currently expected professionalism, counter pointed by WaD principles
4. Give them a fish or teach them fishing?
5. Simplicity complications
6. Sooth-saying or truth-saying: What can we control?
7. WaD and SRI in insurance
8. Clients don’t care? Help them to step up to the plate!
9. Word games: The need for wants, and the repulsion of taxes
10. Peace of mind about the future?
11. Summary: What is WaD dealing then?

The common core of SRI and WaD approaches

Clearly, there is an advantage in the combination of SRI criteria and methods, and other professional and ethical principles. To me, it seems that the inseparable pair of wisdom and decency is the link between, or the foundation below, this combination. It involves constant balancing of many factors, interests, and various time frames, and also flexibilities regarding planning and implementation. In this regard, the key is adaptation and learning, and search for changes in ourselves and outside. At the core of all these is accepting of the view that while financial matters are quite important, they are merely means to live a good life.

Of course, the various professional organizations in the field of finance already have their own ethical principles and guidelines. These are becoming increasingly more elaborate, and they are increasingly more enforced. I’d like to see the bar raised even higher, … up to the extent of espousing the above ‘money is a means only’ philosophy. Keeping the clients’ interest above all could implicitly include it, but I don’t think everyday practice would give credibility to such argument. Typically, it’s just assumed that what is good from a sales point of view is the best for the client. No doubt, it’s not just because of self-interest or greed on the part of sales people or service providers. What is reflected here is the prevailing materialistic and growth-oriented value system of our society, assuming that more is always better. Quality of life is equated with the amount of stuff we own, the size of accounts, and an exaggerated emphasis on social status or pecking order. In my mind, WaD finance is not about the dream of wading in wads of money.

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Who are the WaD advisors?

The extra topics I want to shed light on with the new term are related to professionalism and issues many of us have been having with the financial service industry. If a salesperson or financial adviser sells mainly/only SRI mutual funds, e.g., that person is arguably more aligned with the future, therefore is probably a better professional - all other aspects being the same - than another who neglects or fights SRI considerations. However, at least theoretically, an SRI promoter can be as greedy, as poorly prepared, as unhelpful, as narrow-minded in several other respects, etc., as anybody else. On the other hand, just because someone ‘hasn’t seen the light’ regarding SRI, that person may still be very knowledgeable otherwise, and can be helpful, unselfish, liberating, honest, well organized, a good communicator, etc., … and s/he may have a healthier effect on clients than some SRI advocates.

This is how I see the financial industry from a WaD service point of view, … without claiming any accuracy regarding correctness of proportions, or even the existence of group C. The red oval represents professionals providing WaD services (even if they do not label it as such). The blue circle represents promoters of SRI. There might be, or rather there may crop up, promoters of SRI who are actually providing less than WaD service, represented as group C here. (In a sense, this would probably be a good indication of how mainstream SRI became, … to see that even more mediocre players or questionable characters would find it a promising ‘band-wagon’ to jump on.) On the other hand, there surely are many service providers (group B here) for whom joining the SRI promoters could be a natural and beneficial-to-all kind of next step: broadening of their views an approaches, and redirecting and refocusing their investment offerings.

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Limitations of currently expected professionalism, counter pointed by WaD principles

To see the limitations of currently espoused principles of professionalism, let’s see a few examples.

In my view, professionals are not supposed to put their names on newsletters their only relationship to which is that they paid a few cents for each copy, … but it’s widely practiced and organized or even obligated in some organizations. One might consider this projecting of the false image of expertise as a relatively innocent form of cheating, but cheating it is anyway, … and propelled by something else than the client’s interest.

I think, professionals are not supposed to strive for encroaching possibly all the potential business from a customer either; they do a good job if their own role remains limited and / or gradually shrinks or disappears. Obviously, my view is deemed to be completely crazy by most, since this exactly is one of the leading topics and causes for excitement at various industry functions, in training, and in the business literature. Simply put it, the sole widely accepted (or at least predominant) measure of good work and success in the industry is money earned, and the best way to increase income is the accumulation of assets under management. I think, if professionals are prepared, and keep up with developments, then they have the basis for self confidence to trust that they’ll always have enough patients/clients/customers to earn a decent living. We probably all heard of doctors who charged OHIP for 200 hour per week ’service’ provided, etc. Still, those extremes count as non-typical bad apples in other fields, … while in the financial field greed is part of the dominant culture, and giving priority to clients’ interests too often gets only lip service.

The overwhelming emphasis on getting the business of (or ‘build a fence around’) HNW (High Net Worth, for the sake of the uninitiated) individuals, and the accompanying frequent neglect of ’small fries’ are simply another aspects of the ‘money-making over and above professionalism’ practice. Notwithstanding the principles of public health care, wealthier people and those with higher social status often get better health services than the average citizen. However, I couldn’t believe that it would be openly advocated anywhere that health care professionals should devote more attention and time to a wealthy or higher status person than someone of lower status or more limited means. At least in principle, patients get time and attention according to their real needs. Clients in the financial industry are, however, routinely categorized into classes with distinctly different levels of service , based solely on the income they provide. From a business point of view, this makes perfect sense, of course. From a professional point of view, I don’t think it does.

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Give them a fish or teach them fishing?

If one considers this profession as a helping one, then one should remember the proverbial wisdom about teaching someone to fish vs. giving that person a fish. There are situations when giving the fish is the right choice, but most of the time it’s the teaching. Interestingly, as parents, it’s much easier to realize that we don’t help our children if we make ourselves indispensable, and keep them dependent on us forever. Why is it so difficult then to recognize something similar related to clients in an allegedly helping profession, I wonder. As professionals, we cannot and shouldn’t try to ‘force’ clients to espouse our worldviews, or do more of the managing of their money for themselves. On the other hand, not showing all realistic choices to clients and loosing interest in them if they do go for some that is not in our own best interest are probably very profitable ways, but I would not call it WaD dealing. What I advocate for clients is participation and self-reliance to reasonable and clearly defined / accepted degrees. Via these, there is the opportunity for better outcomes, both financially and psychologically, and a chance to challenge myths that keep clients unnecessarily stressed and controlled.

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Simplicity complications

One important issue around service and client relationship is that of simplification. Simplicity is kept in very high regard by most, and for good reasons. However, not recognizing that oversimplification can distort things, and can lead to premature / false decisions is a mistake. I think, things, issues, situations are not either simple or complicated; they are usually both. Finding the right level and mix of approaches takes open communication, and getting well acquainted with each other. Unfortunately, many clients are not easy partners in this time consuming exploration; brevity and going for the ‘quick solution’ often happens at the expense of being circumspect. WaD professionals, instead of taking advantage of and reinforcing these tendencies, should try to ensure that appropriate time is spent on and attention is paid to issues that are meaningful and consequential. This is the only way to arrive at proper decisions and to provide useful reports and analysis of progress.

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Sooth-saying or truth-saying: What can we control?

Some see as part of our professionalism the playing out of the role of sooth-sayers and motivational speakers. They allege that clients want to get reassured that their (financial) life will be secure with us, and then they’ll become our clients or will increase their business with us. I’m sure it’s correct and acceptable to some degree. On the other hand, I think it’s even more important to be able and willing to speak the truth, even if that is less reassuring. I think, it’s vital to emphasize that many things about our future (even in the narrow financial sense) are uncertain, even with the best intentions and utmost care and caution. Many things are simply not under our control. What follows from it is that we should pay special attention to things that we can control; also, that we should leave options and minds open to adjust plans and actions when a new situation demands that. In terms of controllable factors, perhaps savings, costs, and diversification (in various ways) are the top three most important, after the number one factor: goal setting.

Because of its outstanding role, cost considerations should always be of concern. It happens sometime that an advisor argues for the advantages of segregated funds and downplays their necessarily higher costs, simply because h/se does hold only an insurance licence entitling him/her to sell seg funds and other insurance products but not pure mutual funds. More often, advisors are not even talking about low-cost exchange traded funds, … because they hold only a mutual fund sales license. They argue if needed (some are even convinced I suppose) that actively managed mutual funds are worth their higher cost (MERs), because they are prone to bring higher returns than passive funds (indexes and ETFs). In truth, there is an ongoing debate about the advantages of one or the other. A large body of academic research shows that actively managed funds rarely outperform passively managed funds or indexes, especially if costs and taxation are considered. There are exemptions, and the debate cannot be seen as conclusive. If so, would not it be more honest to tell this to clients - instead of sedating them with half-baked truths - and offer perhaps an appropriate mix of mutual funds and EFTs, even though the latter would bring less or no commission to the advisor?

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SRI and WaD in insurance

In insurance, even more than in investments, the innate conflict of interest situation advisors are in easily distorts their recommendations. While with mutual funds the compensation disclosure is mandated and more or less well performed in most cases, in the insurance field there is no such regulatory requirement. More than that, the disclosure of total - immediate and continuing - commissions is almost unheard of, … even though the differences from option to option (even between variants of same policy) can be very significant. In my view, WaD dealing includes clear compensation disclosure of these various options.

Another thing in the insurance field that can be important to many SRI clients is the fact that even after the big wave of demutualization a few years ago, there are still mutual insurers active in the country, sometimes with very competitive products and services. There is even a non-profit insurer to do business with. One of the latest exciting developments in insurance is that now one can buy SRI funds within an insurance policy as well. There is no regulation that would oblige any advisor to know about these things, or offer them to clients even though they do not specifically ask for them (perhaps merely because they have no idea that these options exist), but they can be seen as important from a WaD point of view.

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Clients don’t care? Help them to step up to the plate!

Today, too many people are (or are kept) in the dark regarding important aspects of their finances. Some others are Do-It-Yourself-ers; many of them so disenchanted from or upset by typical financial industry services that they do not use even those services that they could benefit from. I believe that if WaD dealings were the standard, then more people would do transactions themselves, while they were relying more on clearly defined occasional or ongoing advice and perhaps monitoring services. Today, typically, the roles and functions are mixed and entangled, resulting in unnecessarily high costs and dependency for the client. Seemingly, clients (many of those at least who do not dare to chose the more demanding do-it-yourself road) do not even care about basic things like the total fees they pay for services, what percentage return their own portfolio achieved in a given period, and what could have been realistically expected in the same period. The explanation is, I think, mainly in the poor service they get, the partial and indigestible information and explanations they receive, … and the main reason for the poor service they get is directly related to incentives. As long as ‘I know you’re not interested in compensation, because you make recommendations purely on the basis of what is best for your client (wink-wink!)’ can be a frequent introductory remark by industry representatives talking to advisors (before actually turning to compensation issues), and the general response will be approving giggling, I believe that only a small minority of professionals would pass an imaginary WaD dealing exam.

In a schematic way, this is how people can be categorized according to the financial services they pay for today (Pic 1) and in a situation where they’d get more financial education, and better services because WaD dealing was the norm (Pic 2).

Pic 1		Pic 2
A: They get advice, product, on-going service, and pay commissions. Seemingly the most convenient and cheapest way; appearance too often is false.   B: They pay fees for advice, product, on-going service. Probably, but not necessarily lower costs but at least more transparency. An important step forward		C: They do things partly/mostly on their own, but sometimes they still use experts, possibly for fee. Potentially the best of both worlds.   D: They are the real DIY-ers, … some completely alone, some relying on investment clubs, internet groups, etc. Main advantages: more in control, minimal transaction costs. Main disadvantage: mistakes or lost opportunities due to lower level technical expertise.

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Word games: The need for wants, and the repulsion of taxes

There is a telling, insidious game with words going on as well that I see as an indicator of salesmanship, rather than WaD dealing. Let me give too examples here: one is the equation of wants with needs, the other is the image of the big hairy monster, a.k.a. CRA. I have no problem with talking about the need for someone to buy life insurance to protect minor children, or the need for the accumulation of assets to draw some reasonable / modest retirement income from, … and acknowledge that ‘modest’ may mean quite different amounts to various people. On the other hand, I think it’s more appropriate to talk about someone’s wants (as opposed to needs) when talking about passing on huge assets to next generations, or when discussing ways to help the continuation of a successful business after the founder is out of the picture, e.g. The distinction is not rigid and clear-cut, and it doesn’t mean prioritizing on the part of the service provider: wants can be quite legitimate, understandable, and worthy. Still, the distinction is important from the client’s point of view: it has implications for goal selection and risk taking, and it serves as a good antidote against self-serving salesmanship.

Another linguistic trick constantly played is the treatment of taxes and governments. No doubt that taxation is a most fundamental component of financial planning, and that many-many people could (and should) do better taxation-wise. There are too many tax saving/deferring opportunities under-utilized by many people. What i find troublesome is frequent obsession with taxation and its connotations with political views that deem taxation as such as evil. Any kind of obsession is (or tends to become) dangerous; as Barbara Killinger, clinical psychologist and author, has shown, it distorts character and creates problems in various ways. As for the political overtones, this is how I see them: Some people’s ignorance, many people’s (often quite deep) dissatisfaction with government practices, frustrations by unresolved social problems, or fear of the future are all nicely mashed by the constant ‘all taxes are bad, … fight them tooth and nail’ messages into the promotion of greed, … a motivation most desirable from a salesman’s point of view. One frequent outcome appears to be that community or socially minded people, those who - for example - acknowledge that without significant taxation society cannot function nearly as well as it can with it, see all financial services as bad, unethical, deplorable, … to be avoided as much as possible. I understand some of the ambivalence; on the other hand, I’d argue for tax-saving and financial gain-objectives for these people as much as I do against obsession with taxation or money hoarding in general as life’s main goal for others

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Peace of mind about the future?

Soon after it was published, I already mentioned the Stern Report on the economic aspects of action (or lack of it) regarding climate change in my Nov 2006 newsletter. Since then, it became somewhat known, … but far less widely known and respected than it would deserve. In politics, economic planning, and for corporations, the message of horrible costs and consequences if campaigns at the level of Great Depression and World War efforts are not taken has been heard. I don’t really see the same in the terms of market expectations. Yes, we don’t know for sure if what is ahead of us is comparable in terms of hardship to the 30s and 40s, but there is a good chance it will be. It might be even worse, much worse. Or it might be that science and technology ’saves us’ again, … but you have to be an staunch believer to seriously count on that. Thus, when we rely on past experience and lessons, we should definitely include not only the last 10-20 years.

Many people realized finally the seriousness of climate change from Al Gore’s The Inconvenient Truth presentation. I think, his subsequent book, The Assault on Reason is at least as important, simply because without renewing / saving / developing democracy our societies will remain rather crippled to implement those changes that have to be made. Our individual future is affected and largely constrained by what is happening ‘out in the world’; hence, how we act as citizens is very important from the an individualistic or especially family-centered point of view as well. We each may have very small roles to play, but the effort is surely more worthwhile than trying to ‘outsmart’ the whole world and the markets. To understand this, it’s very helpful to study history, and history and behaviour of markets and financial products as well. Being good at math and statistics can be good too, … some others may get the ability of ‘accepting with serenity the things that cannot be changed, the courage to change the things that should be changed, and the wisdom to distinguish the one from the other’ from other sources. The source of inspiration is much less important than the result, of course. Again, a lot of serenity of this kind is needed when dealing with our life plans and investments, and a lot of citizenship action is possible and vital from an individual planning perspective as well.

Alongside with global climate change and other environmental threats, issues of armament, nuclear proliferation, and violent ways of dealing with conflict are the ones that endanger the most human well-being and even continuing existence on Earth. You’ve probably seen some version of comparing the total military expenditures of the human race with the need for investments in key areas that would make life of billions better. Here is a reminder, … based on data from the 90s. After 9/11 and the obvious increase in needs the general proportions might not be too different, … the tensions are even larger, and the situation is significantly more preposterous and dangerous today. (Notice how modest the cost of solving global warming problems appeared compared to other issues less than a decade ago.)

If you want to see details on the 18 strategies mentioned in the chart, go to this UNESCO page.

Screening out arm manufacturers and other ‘bad guys’ whose activities lead directly and profit from violence and destruction is standard practice by SRI investors. Even without significant SRI investments though, anybody can contribute to positive developments in this field, … partly as an active citizen, partly as a potential donor, or even as a tax-payer. Slow but noticeable changes are happening in peace-promotion most people are unaware of. I consider it part of my WaD approach (even though it will enrich neither you nor me financially) that I recommend that you visit the Canadian Department of Peace Initiative and the Conscientious Objectors to Military Taxation websites, and support these pan-Canadian anti-military and peace-building practical initiatives.

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Summary: What is WaD dealing then?

The WaD money approach realizes that we influence companies and our common future not only SRI investors but also as self-conscious and future-minded consumers, members of the workforce, parents, and citizens of various communities as well. It’s closely related to life planning, striving for health and happiness, and seeking reasonable expectations and control. Its main areas, from clients’ point of view, are:

From advisors’ or planners’ point of view, I suggest the following main issues:

There is progress, there are important regulatory changes in the financial industry that protect the customer, … e.g. establishing, monitoring and enforcing ethical guidelines, promoting best practices, more transparency, disclosure of (even merely potential) conflicts of interest, obligatory use of some basic analytical tools, rules regarding assumptions used for illustrations of potential future outcomes of decisions, continuous professional education requirements, more and better information available, etc. In practice, these higher level services are too often not really internalized, but treated as merely annoying formalities and nuisances.

At the end, it all goes back to how we treat ourselves and each other: