"Kee Points" with Jim Kee, Ph.D.

Taking a quick glance around the world, it looks like economic growth numbers are coming in a little bit better than expected in Europe, China, and Japan, and a little worse than expected in the US (which has entered a “policy churning” or uncertainty stage). Markets seem to be reflecting this, as international markets are outperforming the US year-to-date, although both are experiencing above-average returns. Emerging markets (sans Russia) are up the most, including Mexico. Some of this probably reflects changes in political leadership over the past year or so in some of the emerging market countries (e.g. Brazil, Argentina) as well as a bottoming of commodity prices, but it also reflects a lessening of global trade-war tensions.


There is an interesting investment-related angle to the United Airlines debacle last week (April 9), in which a passenger was forcibly removed from a plane in Chicago. Evidently, anyone flying on a United flight is bound by the airline’s Contract of Carriage, a 37,500 word customer contract that you are advised applies to you when you purchase a ticket. I looked it up, and there are several places in the document that could be interpreted (and I am no attorney) to mean that you agree to comply with the airline in the event of a flight being “oversold” (I was much more bothered by the “consent to use of personal data” section, but that’s another story!).


The point is that there are limitations to disclosure requirements, because even if passengers and United personnel were handed this document, I doubt seriously that they would be able to make heads or tails of it in a situation like the one that took place in Chicago. The investment industry is constantly pushing for increased disclosure, resulting in magazine and book-length documents generated in the name of consumer or investor protections. But some of this is deliberate obfuscation by the industry. Economist Susan Woodward, former chief economist for the Securities and Exchange Commission, often argued for simple, one-page disclosures for investments like mutual funds rather than the industry standard 20+ page prospectuses. She argued that allowing confusion to reign was a form of regulatory capture in which companies in regulated industries influence regulators to their own advantage. The excess minutiae avert clients’ interests from investment managers’ bottom lines. “Blinded by the light” is how law school professor and former SEC Commissioner Troy Paredes aptly describes the information overload that accompanies massive disclosure at the expense of clarity and understanding. Or as General Electric CEO (sarcastically) said in response to the before 2002 Public Company Accounting Reform and Investor Protection Act,” also known as Sarbanes-Oxley:


“I want people to think about GE as a transparent company…If the annual report or quarterly report has to be the size of the New York City phone book, that’s life.”


So if massive disclosure won’t protect investors, what will? Well, one solution is the Department of Labor’s Fiduciary Rule, which demands that investment or financial advisors act in the best interest of their clients (fiduciary standard), and put their clients’ interests above their own. Registered Investment Advisors like STMM are already required to adhere to a fiduciary standard, but not other businesses like broker-dealers, insurance companies, and annuity companies. The rule’s implementation has been postponed until at least June 9, 2017. It is not without its critics, as compliance costs are widely expected to increase for all firms giving investment advice, particularly smaller firms. That’s because compliance cost is somewhat of a fixed cost that has to be spread across fewer customers in the case of smaller firms. As an interesting aside, it was asserted by economists in the 1970’s that larger firms like General Motors and Ford advocated for safety and pollution control devices because they too represented fixed costs (the development costs were the same for all firms) that disproportionately hurt smaller firms like Chrysler, who had to allocate the costs across fewer units (so the cost per unit was higher). Anyway, requiring these other types of business to act in the best interest of their clients is one way of helping individual investors deal with information overload.