Some mornings I wake up, and the news is grim.
The influx of headlines from a day's events in America and Europe, mixed with the news that is breaking in our morning papers can often assault the senses.
Other times, though, I kick off the day feeling like things are on the up.
This morning, thankfully, was the latter.
I woke up to reports that the corporate watchdog, ASIC, is getting ready to ban some financial products.
Or, as the AFR nicely put it:
"ASIC to ban toxic products".
It can't happen soon enough.
The financial services industry is a really, really important one. And I'm not saying that just because I'm part of it.
Indeed, there are large sections of the industry that, frankly, wishes I wasn't.
This is the industry that drains billions of dollars from my and your retirement savings.
This is the industry that charges dead people.
This is the industry that gives poor, conflicted and detrimental advice.
This is the industry that fought against a rule suggesting financial advice should be in the client's best interest.
That you should buy unnecessary insurance. That you should trade more. And that you should punt on short term share price movements.
You've gotta hand it to them: they've been able to convince us that putting $5 on the favourite at Kembla Grange is 'gambling', but trading hyper-leveraged zero-sum manufactured financial products is 'investing'.
They make political spin doctors look saintly!
But despite all that rubbish — and there's a lot of it — many of the functions performed by my industry are really important.
Like helping you get your financial affairs in order.
Helping you plan for — and achieve — a comfortable retirement.
Manage your tax obligations, and help you understand your circumstances.
And stock markets are important, too: They are where new and growing businesses raise capital to fund their growth, and where successful entrepreneurs can find buyers for all or part of their companies.
Of course, so large is the pool of money sloshing around, we shouldn't be surprised that the financial services industry attracts all sorts.
When the prize is so big — and even a minute sliver of it can make you a multi-millionaire — people are incentivised to think up ways of separating you from at least some of your hard-earned.
Want to see some scary numbers?
According to an ASIC calculator, a 40 year old on an income of $85,000 who retires with a Super balance of just over $300,000 (and who is a member of a 'balanced' fund with 'medium-high' fees) will lose over $100,000 in fees by age 67.
More. Than. One. Hundred. Thousand. Dollars.
For what, exactly? I mean, the money doesn't have to be counted. They don't have to wash it, service it, repaint it or put in new carpet.
It just sits there.
And some fund manager somewhere gets one hundred gorillas for the privilege.
Did I mention how bad some of my industry is?
And that's not even close to the worst of it.
(What does that tell you?!?!?!)
At least those managers are likely doing their best to invest the money well. The fund member still ends up with a lot of dough at the end.
Then there's the really toxic stuff, to use ASIC's term.
Let me run an idea past you: What if I was to launch a so-called 'investment product' that took people's money, and gambled it on the TAB?
I mean, sometimes I'd win, and sometimes I'd lose.
The average gambler will, by definition, lose, because the TAB takes its cut before paying out the winnings.
Which, as it turns out, is pretty much the story with CFDs, or 'contracts for difference'.
They're a bet on ultra-short term market movements, with the broker and the exchange taking a cut. And, in this instance, the internet is simply enabling the madness.
Imagine you were in a room with 100 other people for a day, and you each started with $1. Every hour, you bet 'up' or 'down'. Those who were lucky enough, win the bet, less a 10% cut for the house, of course.
After the first hour, half of you have lost your money. And the other half have a sum total of $90.
Next time, another half go, and the prize pool is down to $81.
Then $73
Then $66.
Then $59, $53, $48, $43.
And that's after only eight hours.
Now, two questions:
1. Who wants to keep playing this game?
and
2. Who actually thinks this even slightly resembles 'investing'?
Why do people do it?
Search me. But I would guess it has something to do with those two most destructive of human emotions: greed and envy, mixed in with more than just a little pride.
You can see it in the ads. The naked appeal that implies "This is easy… unless you're not smart enough" and "Just imagine the wealth you could have… like this guy (it's always a guy) in the ad".
Yeah, turns out I'm not a fan of CFDs.
We don't know for sure if that's what's in ASIC's sights. But, if I was ASIC, I'd go much, much further.
Here's the simple test the boffins should apply:
"Does the product assist in the intended function of the equity markets?"
If the answer is yes, great.
If not, then — almost by definition — it's gambling.
Do we really need complex options trading, where the 'instrument' in question is really just a long term bet on the price movement when often neither party actually owns the asset in question?
Do we really need short term betting — literally measured in hours or minutes — on the share price of a company that's trying to plan and execute on a ten-year strategy?
Do we really need short-sellers, whose impact is more often than not the injection of fear — justified or otherwise — into the lives and portfolios of people who are trying to save for retirement? (And spare me the 'price discovery' stuff — it's not like the market is free of huge price swings, or that I wouldn't be able to value Woolworths without it.)
And if people want to do that stuff? Either ban it outright (my preference) or let the online bookies handle it, and let's call if what it is: gambling, no different to a horse race or footy game.
So, all power to ASIC's arm. But don't be gentle, guys and girls. Give it to them with both barrels.
It won't be pretty, and you'll be howled down by vested interests, but here's a tip: the louder they squeal, the more you'll be improving the system.
Frankly, the better ASIC does that job, the worse it'll be for us — we have no conflicts, no vested interests and we sell no complex trading systems or black boxes, which means we stand out against the dross.
Still, I'm not too worried. We've been in business in the US for over 25 years and here since 2011, and we haven't spawned too many copycats.
We don't charge an extortionate percentage of someone's (growing) fund balance. We don't encourage our members to trade, clipping the ticket as we go. We don't get paid to raise capital by companies. In fact, other than a tiny amount of website advertising, all of our revenue comes from our paying members.
Who, frankly, won't join — and certainly won't hang around — unless we're making money for them.
And, so far, we're doing a pretty good job of it.
Now, we know that it's not our scorecard that matters, but yours — and I'm not a victory lap kinda bloke anyway.
But suffice it to say, Motley Fool Share Advisor, our flagship investing service, and the one I've run since 2012, is soundly beating the market since inception.
And we've done it without an option, CFD or trading strategy in sight.
Indeed, our biggest winner, and a company I personally own (bought after we recommended it to members, first), is up more than 10-fold since our recommendation.
You get those sorts of returns by:
1. Buying.
2. Holding
3. That's it.
Not by buying and selling options. Not by gambling on short-term share price movements.
Just the good old-fashioned way. Indeed, our members who took our advice on that stock haven't (yet) paid a cent in capital gains tax, because we haven;t recommended they sell. And they would have paid only one solitary brokerage fee back when they bought the shares… and nothing since.
Oh, and they've been rewarded with some very nice, fully-franked dividends as part of that return, too.
(Spoiler alert: For those of you who aren't already members, the company is Corporate Travel Management (ASX: CTD) and it remains a Buy recommendation.)
It turns out that everyone in this industry just does what works.
But only some of us define that through our customers' eyes. (We like sleeping at night.)
Fool on!
