Who’s cookin’ the books?

You’ve worked for your money, now it’s time your money worked for you — that sums up the appeal of the market to the small, first time investor who has prudently set aside some cash without seriously thinking what to do with it. Instead of conventional saving or reliance on the state pension, an alternative system lies in unittrusts, pension funds and similar financial products providing the opportunity to play the markets indirectly. And more, the huge wave of privatisations  have opened the door for direct investment in the market to millions. It’s an attractive notion, both to consumers and their governments across the world, which have taken steps to boost the financial services industry by liberalising the scope of its activities and putting the population at large on notice that they are expected to do more to provide for themselves. This raises an important issue. State pensions and investments in government bonds are by definition safe. They are part of the social contract between a government and its people. More practically, they are effectively guaranteed by the central bank. Equity markets do not offer anything like the same degree of security.

Some investments are safer than others, but the rule of “caveat emptor” (buyer beware)  applies to all of them. Choosing to invest is a process of risk management. And to manage risk effectively, investors need as much relevant information as possible. This is why transparency — and its twin, accountability — have become buzzwords in financial circles. For the investor, transparency is fairly straightforward business. According to one market analyst, first time investors should operate a simple checklist when approaching a financial professional. “First, check that he is properly accountable to his superiors for his professional and ethical conduct. Second, make sure that he understands and observes conflict of interest restrictions. And third, find out what his or her qualifications are for the job being done.” Transparency campaigners say that this level of disclosure should be a legally mandated minimum. Other professionals disagree. “A responsible  company will offer all this information voluntarily to gain the confidence of the investor,” said one.

“Companies that don’t, won’t have that confidence. Besides, we’re in the business of markets so it’s hardly a vote of confidence to say that we need government intervention.” The problem with this, say transparency campaigners, is that lax rules on disclosure enable financial services companies to conceal high management charges and so provide the industry as a whole with the inducement to act as kind of cartel. It is in no-one’s interest to break ranks and offer the consumer a better deal. And the growth of execution only brokerages and do-it-yourself online trading facilities has also led to a perceived fear that if the consumer becomes too familiar with what an asset manager does, he might decide to cut out the middleman and do it himself. A similar argument operates at government level.  The strong economic performance in countries like the United States has been fuelled by an unprecedented flow of private and institutional money on to the equity markets.

History — from Tulip-Mania, through the South Sea Bubble, the Wall Street Crash of 1929  to the dotcom boom and bust — is full of smart young things who only later  realised they were only riding the wave they think they are controlling. Nor should we forget there are real crooks about. The further from his/her money an investor is the more chance of being exploited by an elaborate “sting.” The desire to make money easily by fabulous “unmissable” opportunities can deceive even the shrewd. In a book both tragic and comic, The Big Con, David W Maurer gives many examples of prudent businessmen who have easily been swindled when they have moved into unfamiliar areas of investment. The Internet  is a whole new field for the confidence trickster. However, high, legally enforceable standards of transparency may generate a culture of scepticism in potential investors, runs the argument. This reduces transfers to the equity markets, which has a knock on effect on overall economic performance and on individual investment portfolios. In  short, a little knowledge is a dangerous thing. (Continued next week)

ACCA (the Association of Certified Accountants) is the largest and fastest growing international professional accountancy body in the world. We currently have almost 320, 000 students and members in more than 160 countries. The organisation has over 70 offices worldwide, including a Caribbean office based in Trinidad and Tobago.