The take of SqueezePlay's Kevin O'Leary on the fate of retail investors of ABCP
"Maybe Granny will actually ask her broker next time (the person puts her into a piece of paper) what it is she's buying. Maybe you need these lessons occasionally to cleanse the markets....to scrape the plaque off the veins that make the financial system run."
So says Kevin O'Leary on April 22, 2008, as he makes the case for retail investors not getting back the par value of their asset-backed commercial paper (ABCP) suggesting instead that the value should be what the market dictates. I was complete shocked at the opinion put forth by the SqueezePlay anchor. The man, who shot to mainstream fame in Canada on CBC's the Dragons' Den, has the idea that retail investors should hold themselves responsible for not doing enough due diligence. I'd like to present is a Canaccord advisor's e-mail to his or her client suggesting ABCP:
We have been able to secure a block of AAA 1 year money market paper yielding 4.80 to our clients. This paper offers the following:
- Liquidity: You can sell the Planet Trust at anytime before maturity. GICs are non-redeemable.
- Protection of the capital: The rating of the Planet Trust is AAA credit. GICs are only ensured [yes, the broker misspelled it...it's "insured"] up to $100000.
This e-mail was taken from none other than SqueezePlay. Tell me, Kevin...Is it really possible for retail investors to do further due diligence being pitched of the merits of an investment in such a manner? Especially, when Canadians rely on their financial advisors as being their source to the happenings in the investment industry. Here they are being pitched an investment product as a substitute to a GIC. Until the offer to match par by Canaccord, which was recently matched by Credential Securities (the other party in this debacle), these investors were risking losing everything with no liquidity. Market pundits were putting the value of this paper at twenty cents to the dollar no more than a few months ago (now, it's looking more like sixty apparently). Imagine....close your eyes, Kevin....losing 80% or 40% or whatever '%' of your investment on something that was recommended to you as liquid (which it currently isn't) and as a substitute to a GIC? Uncanny.
It is absolutely shocking that the man seeing what he has seen would have such an opinion. You can't argue that he made this argument out of ignorance. You can't argue that he made this argument out of a lack of competence. What are we left with? This attitude will destroy the profession of finacial advice. Advisors should be trusted to make suggestions given their clients' needs. This is the reason full-service financial advisors are recruited in the first place. Having to second-guess constantly and to take out of this "don't trust anything that's being recommended to you," will seriously undermine the profession. This paper had a high credit rating and was exempt from prospectus disclosure, so even due diligence wouldn't have saved them. Wouldn't it be more powerful to give the players involved a sense of accountability over what has been done? Penalties? Fines? Lawsuits? Wait, lawsuits are looking very unlikely, as it is a condition for the retail clients to get their money back.
With the vote on the proposed plan of investors being bought out at 100 cents to the dollar being held this week, it is widely expected (indicated by proxies coming in) that retail investors will accept the offer. Of course, they should, but, as stated, they will give up their right to pursue legal action. Not exactly a great thing, as it won't help the players develop a sense of accountability. This is where the problem lies.
I do want to give credit to Mr. O'Leary...His imagery of paralleling "plaque" to retail investors being sandbagged is incredibly poetic. Rudyard Kipling couldn't have done a better job.
Sources: SqueezePlay [BNN], Globe and Mail "ABCP ruling to come Thursday"
Labels: ABCP, Canaccord, Kevin O'Leary
posted by Zahid Jafry @ 7:55 PM
5 Comments:
Is it April Fool's again, already?
I don't think it's wrong for investors to be compensated for their losses by their advisors when they received bad advice, but there's a few too many people suggesting people shouldn't be exposed to any risk from things they don't know so Kevin O'Leary's comments make more sense than this post. Any "bailout" should be entirely between the investor and their advisor.
If you really want to restore people's trust in financial advisors, I suggest this - when you tell someone their investment "protects their capital", sign a contract BEFORE they invest that states you'll compensate them for their full loss if it turns out later on that it doesn't actually protect their capital.
It's true - if you invest in something because your advisor writes "Liquidity: You can sell the Planet Trust at anytime before maturity. GICs are non-redeemable.", you actually do need to know what liquidity means and to what extent it's really guaranteed. If you want an investment to be 100% liquid at all times, just agree that you'll buy it back from the investor at the original price at any time.
Nothing will destroy trust in the financial advice profession faster than making promises that others have to keep or that you can decide to keep after the fact. You need to decide if you're in the business of offering advice for what someone will do themselves, or actually insuring their investments, and then act accordingly.
Meanwhile I'll be out there with Mr. O'Leary - investing in things I understand and learning the lesson when I overlook details (the horror! he takes responsibility for his own actions!).
Is it April Fool's again, already?
I don't think it's wrong for investors to be compensated for their losses by their advisors when they received bad advice, but there's a few too many people suggesting people shouldn't be exposed to any risk from things they don't know so Kevin O'Leary's comments make more sense than this post. Any "bailout" should be entirely between the investor and their advisor.
If you really want to restore people's trust in financial advisors, I suggest this - when you tell someone their investment "protects their capital", sign a contract BEFORE they invest that states you'll compensate them for their full loss if it turns out later on that it doesn't actually protect their capital.
It's true - if you invest in something because your advisor writes "Liquidity: You can sell the Planet Trust at anytime before maturity. GICs are non-redeemable.", you actually do need to know what liquidity means and to what extent it's really guaranteed. If you want an investment to be 100% liquid at all times, just agree that you'll buy it back from the investor at the original price at any time.
Nothing will destroy trust in the financial advice profession faster than making promises that others have to keep or that you can decide to keep after the fact. You need to decide if you're in the business of offering advice for what someone will do themselves, or actually insuring their investments, and then act accordingly.
Meanwhile I'll be out there with Mr. O'Leary - investing in things I understand and learning the lesson when I overlook details (the horror! he takes responsibility for his own actions!).
Regarding the last comment, an advisor is not allowed under any circumstances to compensate a client for losses.
It is a legitimate point that a client can't be expected to get back his or principal when the market dictates otherwise. If this was the norm, there would be no reason to assess a client's risk vs. return. Why doesn't everybody shoot for the stars and then cry foul when they suffer losses?
I believe this is a unique situation, and O'Leary's remark ultimately undermines the gains made to make full-service financial advisors a legitimate profession rather than just another salesperson. The financial advisors and their parent brokerage should be held accountable...not the clients who trusted them.
As the e-mail posted suggests, the information provided to 'pitch' the investment is inaccurate, which severely limits the client's ability to make an educated decision. Of course this is one instance of a couple thousand. It'd be very hard to assess the dynamics of what's fair on a case by case basis.
That just makes the point that advisors can help you find good investments and propose the best moves when you don't have time to figure it out but you still need to understand what you're doing - in the same way that management consultants can't run a company if the executives or managers employing them don't understand their recommendations.
Unfortunately there will always be people looking for someone who promises to provide perfect answers while the customer takes on all the risk; hopefully the recent events will help more people accept reality. O'Leary's comments can only help this process.
I work with similar issues every day - clients need to believe that I'm making the right decisions. Of course there will always be stories about people who didn't realize how bad the service they were getting is, but that's why it's important to put in the time and effort to build a good reputation and be ready to educate anyone who has questions (I do provide a stronger guarantee since I frequently work with technologies that clients need to employ without taking years to fully understand them).
In the case of financial advice, the basics are simple - like asking questions when something has a return higher than the benchmark risk-free rate and understanding that there's probably a reason. The best thing to do would be to actively educate clients and remind them when you think they're doing something that goes against their goals (and why).
Any advisor that can't guarantee the results of their advice and knows their clients don't know what they're getting involved in is doing them a disservice. It can even be a great marketing tool if you put together an informational site that explains the basics of investing. You can either sell PPNs and GICs or help people understand what they're doing - anything else will end up in the news sooner or later.
That just makes the point that advisors can help you find good investments and propose the best moves when you don't have time to figure it out but you still need to understand what you're doing - in the same way that management consultants can't run a company if the executives or managers employing them don't understand their recommendations.
Unfortunately there will always be people looking for someone who promises to provide perfect answers while the customer takes on all the risk; hopefully the recent events will help more people accept reality. O'Leary's comments can only help this process.
I work with similar issues every day - clients need to believe that I'm making the right decisions. Of course there will always be stories about people who didn't realize how bad the service they were getting is, but that's why it's important to put in the time and effort to build a good reputation and be ready to educate anyone who has questions (I do provide a stronger guarantee since I frequently work with technologies that clients need to employ without taking years to fully understand them).
In the case of financial advice, the basics are simple - like asking questions when something has a return higher than the benchmark risk-free rate and understanding that there's probably a reason. The best thing to do would be to actively educate clients and remind them when you think they're doing something that goes against their goals (and why).
Any advisor that can't guarantee the results of their advice and knows their clients don't know what they're getting involved in is doing them a disservice. It can even be a great marketing tool if you put together an informational site that explains the basics of investing. You can either sell PPNs and GICs or help people understand what they're doing - anything else will end up in the news sooner or later.
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