The Independent Financial Advisor

TRUSTINGThe Independent Financial Advisor

www.cifango.org €35 – N°7 – January/June 2015

Join CIFA’s XIIIth International Forum in Monaco on April 22-24, 2015

CIFA’s XIIIth International Forum 2015 8 “PUBLIC DEBTS, & DEFICITS, UNRESTRAINED TAXATION: WHO WILL PAY?” CIFA’s new ADVISORY ROLE at the UNITED NATIONS 12 François Loriot On PIKETTY’s misunderstanding of “CAPITAL” 74 Stephen B. Young Insurance: At the Crossroads of Change 108 www.bzb.be TO BREAK THE RULES, YOU MUST FIRST MASTER THEM.

THE VALLÉE DE JOUX. FOR MILLENNIA A HARSH, UNYIELDING ENVIRONMENT; AND SINCE 1875 THE HOME OF AUDEMARS PIGUET, IN THE VILLAGE OF LE BRASSUS. THE EARLY WATCHMAKERS WERE SHAPED HERE, IN AWE OF THE FORCE OF NATURE YET DRIVEN TO MASTER ITS MYSTERIES THROUGH THE COMPLEX MECHANICS OF THEIR CRAFT. STILL TODAY THIS PIONEERING SPIRIT INSPIRES US TO CONSTANTLY CHALLENGE THE CONVENTIONS OF FINE WATCHMAKING.

ROYAL OAK OFFSHORE IN PINK GOLD. CHRONOGRAPH. TRUSTING The Independent Financial Advisor Owner & Publisher CIFA Foundation Rue du Vieux Collège 3 P.O. Box 3255 CH - 1211 GENEVA 3 Switzerland Tel: +41 22 317 11 11 Fax: +41 22 317 11 77 www.cifango.org Editorial Board (EB) Pierre Christodoulidis, CIFA’s Executive President & President of the EB Vincent J. Derudder, FECIF’s Honorary Chairman Leong Sze Hian, Former President of Society of Financial Service Professionals Zoltan Luttenberger, PhD - RFPH, Zoltan Luttenberger SMLLC Stephen B. Young, Global Executive Director, Caux Round Table Editor in Chief Cosima F. Barone, FINARC SA - www.finarc.ch Contributors to this issue H. E. Mr. Nassir ABDULAZIZ AL-NASSER Shweta Agarwal, Ph.D. Cosima F. Barone Robert G.J. van Beek Pierre Bessard Phil Billingham Lubomir Christoff, PhD ChFC Pierre Christodoulidis Henry Cobbe Richard Crotty Vincent J. Derudder Jean-Pierre Diserens Vania Franceshelli Steve H. Hanke Garry Heath Diane Jacobs François Loriot Zoltan Luttenberger PhD Amel Merabet Hanifa Mezoui Roy Ngerng Guillaume Prache Gilles-Guy de Salins Andrea Slattery Leong Sze Hian Aldo Varenna Albert Verlinden Stephen B. Young Photos & Images www.fotolia.com www.cifango.org Distribution Franco Rossi, www.privatebanking.com CIFA’s Partner Federations & Associations 70 across the globe, listed on page 113 Realized in Cooperation with Caux Round Table FECIF GSCGI-SAIFA Private Banking ______TRUSTING N°7 – January/June 2015 3 CIFA’s MILESTONES

From foundation to present

CIFA, a non-profit Swiss foundation, was setup in Gene- By 2007, CIFA had already become an NGO (non-gov- va, Switzerland, in December 2001, aiming to become ernmental-organization) in “special consultative status” the ideal contact point for financial advisors and wealth with UN’s ECOSOC, the United Nations’ Economic and managers, as well as legislators and regulators. Social Council. CIFA attends and speaks at several UN With individual investors’ needs in mind, CIFA chose to gatherings organized at the initiative of the General As- focus on enhancing the basic status (the very founda- sembly, ECOSOC, UNCTAD, UNITAR, FOSS, etc. tions of their independent businesses) of IFAs around the A year later, in 2008, “THE CHARTER OF INVESTORS’ globe, by promoting the highest professional standards, RIGHTS” (www.cifango.org), developed under the su- best-practice rules and ethical rules. pervision of UN’s ECOSOC, was introduced during the th These specific goals have been pursued relentlessly by CIFA’s VI Forum held in Prague, The Czech Republic. CIFA, which has the highly impressive ability to approach Finally, the basic rights of investors were taken into ac- them from several interesting angles through the intel- count in finance! ligent selection of renowned international speakers. In February 2005, The United Nations reclassified CIFA to Each year, the appropriateness of topics discussed, the the “general consultative status” with the UN-ECOSOC. excellence of presentations and relative roundtable dis- As a result, CIFA joined the select UN club of 150 NGOs cussions have been remarkable. accredited to interact during UN thematic debates.

CIFA’s INTERNATIONAL Forums in past years Through the years, CIFA Forums were held in Geneva (2003 through 2007), Prague (2008), Paris (2009), Madrid (2010) and Monaco since 2011 to present. 2003 — What Challenges for Independent 2010 — Financial Bubbles and Regulatory Financial Advisers? Bubbles 2004 — Reinventing Trust 2011 — Ethics and governance in fInancial 2005 — Let’s provoke a dialogue with the markets Financial Services - Reform or regulators Die? 2006 — Legislation and Regulation: real 2012 — 2012, election year: what challenges problems, poor solutions! for the international financial system? Ethics, Politics and Finance 2007 — Let’s face the future! 2013 — Can the World Financial System be 2008 — Investor’s freedom or consumer’s Reformed? protection? 2014 — THE NEW PARADIGM FOR WEALTH MANAGERS 2009 — Recurring financing jolts & crises - Freedom, Regulation, Transparency, Taxes, Advance warning signs of a New Economic Rule of Law, Expropriation, Privacy and much World Order more!

______4 TRUSTING N°7 – January/June 2015 CONTENTS

EDITORIAL 7 La Pauvreté peut être battue, pas la Haine Pierre Christodoulidis

CIFA’s FORUM 2015 th TRUSTINGThe Independent Financial Advisor 8 XIII International Forum Monaco, April 22-24, 2015 www.cifango.org Program and Registration Form €35 – N°7 – January/June 2015 Join CIFA’s CIFA’s FORUM 2014 XIIIth International Forum th in Monaco 11 XII International Forum - White Paper on April 22-24, 2015 Monaco, April 23-25, 2014

CIFA’s MILESTONES 12 CIFA’s New Advisory Role at the United Nations Me François LORIOT

CIFA’s SPECIAL EVENTS 19 CIFA - UNOG day th The Financial Sector’s Partnership and Contributions CIFA’s XIII International Forum 2015 8 “PUBLIC DEBTS, & DEFICITS, UNRESTRAINED TAXATION: WHO WILL PAY?” to the Post 2015 Development Agenda and Strategies CIFA’s new ADVISORY ROLE at the UNITED NATIONS Geneva, Jan. 15, 2015 12 François Loriot On PIKETTY’s misunderstanding of “CAPITAL” 30 UNAOC’s Sixth Global Forum 74 Stephen B. Young United Nations Alliance of Civilizations Insurance: At the Crossroads of Change Bali, Indonesia, 29-30 August 2014 108 www.bzb.be

UP IN THE NEWS INVESTING ...cont’d 38 Short notes 92 Practical Investing The Bitcoin or the big con?, Gilles-Guy de Salins 40 Regulatory and Legal Evolution Overcoming the Behavioural Barriers to Smarter Investing, Henry The IFA message to European Regulators, FECIF Cobbe, Shweta Agarwal & Robert G.J. van Beek Financial Advice in Europe under MiFID 2, Lubomir Christoff, PhD The Juncker Commission: a commitment to..., Vincent J. Derudder 102 Tax Corner The Impact of RDR on the UK Market, The Heath Report, Garry Heath Avertissement pertinent sur une fiscalité excessive, Amel Merabet The Sustainable Development Goals: What Can Be..., Leong Sze Hian 59 Opinion Quando il Promotore Finanziario è DONNA, Vania Franceshelli Are You Ready for a New Dawn? Richard Crotty The 4 Myths of the RDRs, Phil Billingham THE LIFE OF ASSOCIATIONS 108 Presentation of BZB - www.bzb.be Beroepsvereniging van Zelfstandige Banken verzekeringsbemiddelaars INVESTING 68 Best Sectors & Best Trends 111 Events Schedule Lessons from the Swiss Franc crisis of 15 January! Leong Sze Hian ANASF’s ConsulenTia 2015, Rome, Italy Azimut Group, Story of Success, Aldo Varenna 112 Building Bridges between professionals 70 Experts’ Views Developing Cross-border Advice, Dr. Z. Luttenberger PhD New Research Findings on Pension Savings Returns, Guillaume Prache The history of Australian superannuation, Andrea Slattery

74 Global Economy and Central Banks On PIKETTY’s misunderstanding of “CAPITAL”, Steven B. Young 115 Partner Associations Currency Wars, the Ruble and Keynes, Steve H. Hanke

______TRUSTING N°7 – January/June 2015 5 A GROUP OF SWISS IFAs

… CARING ABOUT PRINCIPLED PROFESSIONALISM AND UNBIASED DEDICATION TO CUSTOMERS’ NEEDS …

Groupement Suisse des Conseils en Gestion Indépendants www.gscgi.ch

3, rue du Vieux-Collège P.O. Box 3255 1211 Geneva 3 Tel. +41 (0) 22 317 11 22 Fax +41 (0) 22 317 11 77 [email protected] — [email protected]

* * * All you need to know about investing and regulatory environment brought to you monthly by... “The IFA’s WEALTH GRAM”

THE IFA’s THE IFA’s THE IFA’s THE IFA’s LA TRIBUNE MENSUELLE LA TRIBUNE MENSUELLE LA TRIBUNE MENSUELLE LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI DES MEMBRES DU GSCGI DES MEMBRES DU GSCGI DES MEMBRES DU GSCGI Wealth [email protected] Wealth [email protected] Wealth [email protected] Wealth [email protected] www.gscgi.ch www.gscgi.ch www.gscgi.ch www.gscgi.ch Vol. III Vol. III Vol. IV Vol. IV Gr a m N°34 - Novembre 2014 Gr a m N°35 - Décembre 2014 Gr a m N°36 - Janvier 2015 Gr a m N°37 - Février 2015 EQUITIES FIRST L’èrE du SAInT ESprIT OPPORTUNITY LE CLASH OFFERS A PROVEN SOLUTION COMES IN UNEXPECTED PACKAGES dES bAnquES CEnTrALES

IG.com

Groupement Suisse des Conseils en Gestion Indépendants • www.gscgi.ch Groupement Suisse des Conseils en Gestion Indépendants • www.gscgi.ch Groupement Suisse des Conseils en Gestion Indépendants • www.gscgi.ch Groupement Suisse des Conseils en Gestion Indépendants • www.gscgi.ch EDITORIAL

La Pauvreté peut être battue, pas la Haine

Le titre est volontairement provocateur. que la domination d’inégalités “héritées” pauvres. Le mécontentement et la frustra- Le Financial Times, symbole du capital- peut conduire à une destruction du capi- tion de ces derniers, par définition les plus isme intelligent analysait fin 2012 l’état talisme. nombreux, génèrent une haine envers les possédants qui risque de se traduire par de l’économie de marché. Dirigeants Il est clair que plus le cercle des domi- un affrontement d’une violence propor- d’entreprises, commentateurs spéciali- nants se réduit par concentration et se tionnelle à la durée et à l’intensité de ce sés, économistes, élus politiques, entre- transmet à un nombre de plus en plus phénomène. L’opacité et la taille vont de preneurs des quatre coins du monde, réduit de mains, plus le système encourt pair. La taille génère l’opacité qui à son commentent la santé de notre système des risques de dérapage. Joseph Stiglitz tour incite à la prédation, plus on devient économique. Titre choisi de cette longue a exposé durant les rencontres de Lindau gros plus on a tendance à s’approprier des série d’articles «Le Capitalisme en Crise». les forces qui mènent à une augmentation entreprises dans le même domaine. Ce Le jugement d’ensemble est sévère, on des inégalités alors que Eric Maskin (autre gigantisme, contraire à l’esprit même du peut le résumer ainsi: la formule «ultra- prix Nobel d’économie) exposait pourquoi capitalisme, étouffe les nouvelles initia- libérale-dérégulée» du capitalisme héri- les marchés globalisés n’ont pas réduit les tives entrepreneuriales et condamne le tée des années 1980 a échoué. Sous cette inégalités dans les pays émergents. “En système à un appauvrissement certain et forme, l’économie de marché s’est avé- effet, pourquoi respecter les règles du à une spirale de la haine. rée non seulement instable mais, et de système ...s’interrogent les protestataires... manière importante, aussi injuste. “Nous si le système produit de manière régulière Pour l’instant, il y a peu de signes chez les vivons dans un système qui a collectivisé des crises sans punir les responsables?” A politiques qui montrent la volonté de ces les pertes et privatisé les gains”, dit Jo- notre sens, la constante est là et les poli- derniers de combattre cette tendance du seph Stiglitz. Les physiocrates voulaient tiques doivent avoir le courage d’y faire gigantisme, quoique les récentes déclara- réduire la dette, les classiques accélérer face: la création de richesse qui procède tions du gouverneur de la Bank of Eng- la croissance, les Keynésiens diminuer la de la création de nouvelles entreprises ou land, tendent à indiquer une prise de con- chômage. En l’occurrence, dans la crise techniques de financiarisation dépendent science de certains dirigeants vis-à-vis de actuelle, nous devrions réaliser les trois de l’information détenue entre peu de ce phénomène. Ce gigantisme procède buts énumérés ci-haut. mains. Le nombre de détenteurs de ces de deux logiques cohérentes: d’abord on Dans son livre récent Thomas Picketty informations s’est naturellement réduit constate une concentration de richesse, «Le Capital au XXIe siècle» n’examine pas par la consolidation constante des ac- et donc de puissance, entre un nombre en profondeur un des facteurs qui préoc- teurs de la finance et ceci peut mener (va de plus en plus réduit de possédants qui cupe de plus en plus les chercheurs et mener?) immanquablement à une réac- a comme corollaire une réduction évi- économistes, et notamment ceux qui ont tion dont on ne connaît pas encore ni la dente de la responsabilité pénale de ses reçu un prix Nobel, à savoir l’augmentation nature ni l’ampleur. Il est par contre cer- représentants. Ensuite on assiste de plus des inégalités des divers intervenants de tain que le nombre de pauvres résultant en plus à des règlements de tels cas sous la vie économique. Lors de la 64è rencon- de pratiques financières criminogènes forme d’accords transactionnels, le dernier tre des lauréats de prix Nobel de Lindau augmente et cela dans les strates de pop- en date étant celui du Crédit Suisse pour (ce sont des réunions qui ont été organisées ulation essentiellement citadines et, sou- 2.6Mrds de US$. à partir de 1951 après la guerre entre les vent, bien éduquées qui ne trouvent plus Oui, mais voilà, Mr. Carney (BOE) n’est pas lauréats de Nobel), le thème central était de débouchés de travail. Dans le même un politique. Il peut introduire certains précisément “L’inégalité”. Dans son livre, ordre d’idées, les ressources financières garde-fous, mais c’est aux politiques et à Picketty s’inquiète ouvertement des iné- tendent à se concentrer sur les désormais leurs nombreuses commissions d’experts galités croissantes, qui mènent imman- bien connus “TBTF-ou acteurs financiers de lancer/formuler les processus judici- quablement vers moins de démocratie systémiques” menant inexorablement à aires qui s’imposent avant qu’il ne soit car elles peuvent créer des tensions fortes une déchirure sociale profonde entre ces trop tard. sur le plan social et politique, et souligne deux groupes sociaux riches/nouveaux Pierre Christodoulidis

______TRUSTING N°7 – January/June 2015 7 CIFA’s FORUM 2015 / Program

PRELIMINARY PROGRAM XIIITH INTERNATIONAL CIFA FORUM MONACO, 22-24 APRIL 2015 PUBLIC DEBTS, & DEFICITS, UNRESTRAINED TAXATION: WHO WILL PAY? Wednesday 22 April • Too Big to fail. Most can fail but some can’t: An injustice at the core of global capitalism? 14:00 Official opening ceremony • Can Moral Capitalism exist? • Can wealth management survive in the market of only 15:00 ECOSOC Roundtable with UN High representatives the top 1% HNWI? and the Civil Society. • Does too much financialism kill capitalism? Moderator: Hanifa D. Mezoui, Ph.D., Senior Advisor Huma- nitarian Affairs and Civil Society, United Nations Alliance of • Will banks ever get back to supporting capitalism with Civilizations (UNAOC), New York business loans? If they don’t, then who needs banks? • If banks won’t support economic growth, who will? Confirmed Speakers: Mutual Funds? Crowd Funding? Navid Hanif, Director, Office For ECOSOC Support and Coor- dination, Department of Economic and Social Affairs (DESA) Confirmed Speakers: United Nations William K. Black, Member of the Advisory Board, Associate Fabienne Guien, Secretary General, Economic and Social Professor of Economics and Law, University of Missouri, Council, Monaco Kansas City, USA H.E. Amb. Elshad Iskandarov, President, ICYF-DC, Istanbul, Daniel Mitchell, Senior Fellow, Cato Institute, Washington, Turkey USA e Marc Roche, Foreign correspondent in London for the M Francois Loriot, President, Bar Association for Inter French weekly magazine Le Point and economic specialist, Governmental Organizations Author of the best-sellers Bank: How Goldman Sachs Rules Dr. S. William Gunn, International Association For Humani- the World, Outlaw Capitalism, and Banksters tarian Medicine Brock Chisholm, Geneva, Switzerland Roger Nightingale, Economist, RDN Associates Ltd, London, Ruth Bamela Engo, President, African Action AIDS (AAA), UK Yaoundé, Cameroon 10:30 Coffee Break 16:00 Taxation and automatic exchange of information: what’s left of our privacy? 11:00 THEME 2 Financialization and speculative bubbles, Confirmed Speakers: deepening of inequalities, economic stagnation: how to Adolfo Enrique Linares Franco, Partner, Tapia, Linares & Al- stop the deflationary spiral? faro; President Aegist Asset Advisors Inc; President Chambers • A crisis of confidence triggered by unconscionable of Commerce, Industries and Agriculture of Panama; Vice behaviors is pushing savings into institutional networks Minister of Education from July 1, 2001 to January 1, 2004 (pension funds, insurances, etc...) instead of into real Alexis Lautenberg, Chairman of the Swiss Finance Council, economy growth. Who will reverse this trend? Senior Policy Advisor at Steptoe & Johnson, Brussels, Belgium • Which economic engines for the future: innovation, Xavier Oberson, Professor of Swiss and international tax solidarity, fight against tax optimization? What can start law at the University of Geneva, Partner at Oberson Avocats, the engines of economic growth? Innovation, solidarity, Geneva, Switzerland middle class entitlements, lower taxes? Stephanie Jarrett, Partner, Baker & McKenzie, Geneva, • Can moderate inflation restart consumer demand? Switzerland Confirmed Speakers: Lenore Elle Hawkins, MBA, Partner, Meritas Advisors, San 16:45 The fiscal equity principle and the legal adviser in Diego, USA this new context Steve Young, Global Executive Director, Caux Round Table, Confirmed Speaker: Amel Merabet, Corporate Jurist St. Paul, Minnesota, USA Michel Girardin, Founder of MacroGuide, Lecturer at the 17:15 Is altruism compatible with mordern economic University of Lausanne and Geneva, Switzerland systems? Markus P. Grimm, Managing Director, Special Investment Confirmed Speaker: Matthieu Ricard, Buddhist monk, Situations, Hermes Partners International Ltd, Hong Kong photographer and author 12:30 Networking Lunch 18:00 End of the first day 14:00 Solutions made in Luxembourg in an international 19:30 Cocktail unstable environment Zulmiro Da Costa, Relationship Manager France, Lombard International Assurance Thursday 23 April Christian Eilert, Director, ACA Paula Leite, Head of Markets Development, Cardif Lux Vie 8:55 Welcome address by the Day Chairperson Marc Nicolas, International Sales Manager, Vitis Life Afaf Konja, Spokesperson for the President of the United Nations General Assembly 68th Session, New York, USA 15:00 THEME 3 Debt or growth? • Was it a mistake to grow debts after 2008? 9:00 THEME 1 Are capitalists about to kill capitalism? Is finance killing off capitalism? • Federalism, regionalism, decentralization: which of these models are better fit to trigger world growth? • Public debts and bankruptcies: which remaining public assets can be put on sale? Should everything be privatized? ______8 TRUSTING N°7 – January/June 2015 Program / CIFA’s FORUM 2015

PRELIMINARY PROGRAM XIIITH INTERNATIONAL CIFA FORUM MONACO, 22-24 APRIL 2015

• To pay off public debts will we need to confiscate Confirmed Speaker: savings through inflation or taxation? Andrea Slattery, CEO, SMSF Association, Australia • Stagnation, deflation: deeds not words from the decision makers 11:20 Coffee break Confirmed Speakers: Werner Eichhorst, Director of Labor Policy Europe, Institute for the Study of Labor (IZA), Bonn, Germany 11:40 From Sales to Advice: What can we learn from RDR? What trade offs and trends? David Cayla, Academic teacher’s/researcher, University of Angers, France; member of Les Economistes atterrés • What changed the best advisory businesses to adapt? Aymo Brunetti, Professor for Economics at the University of • How reacted the clients and the platforms? Bern, Switzerland • Can we close the advisory gap? Louise C. Bennetts, Executive Director, J.P. Morgan, London, UK • What challenges still ahead? Confirmed Speakers: 16:00 Monaco for Finance Phil Billingham CFP, Transition Expert, UK Confirmed Speaker: Hervé Ordioni, President - Committee Garry Heath, Editor, The Heath Report for Promotion of Monaco as Financial Center, Monaco Asso- Gilles-Guy de Salins, Vice-President of ANCDGP, France ciation for Financial Activities, Monaco Paul Stanfield, CEO, FEIFA, England

16:30 Coffee Break 12:30 Networking Lunch

17:00 THEME 4 Western economies against a multipolar 14:00 Behavioral Finance: Searching for the Holy Grail... we world: which model will prevail? didn’t find the Best Product. • The uprising of emerging countries against the grip of • So we try to pick the Best Tool instead? western economies? • Softwares, Platforms, Best practices: • Tertiarization, financialization against productive economies: who will arbitrate the debate? • How to navigate? Confirmed Speakers: • How can help Behavioral Finance? Francisco Alvarez De Soto, Managing Partner, Alves & Co. Confirmed Speakers: Attorneys at Law; former Minister of Foreign Affairs, former Robert van Beek CFP, President of FPA Belgium, European Deputy Minister of Foreign Affairs and former Deputy Minis- Representative of Behaviorgap.eu ter of International Trade Negotiations of Panama Henry Cobbe CFA, Managing Director, Target Date Fund Henri Sterdyniak, Director of the Economics Department Expert, Elstonconsulting UK of the globalization of the French Economic Observatory Richard Crotty FMII MIITD QFA APA, Expectation Manage- (OFCE), Paris, France ment Expert, Ireland Paul Resnik, Co-Founder, FinaMetrica, Australia 18:00 End of the second day 14:40 ID theft: a major threat for the coming years 20:00 Patrons’ Dinner at the Hotel Hermitage by invitation only (Black tie suggested) Confirmed Speaker: Gilles Duteil, Director of CETFI, Aix-Marseille University, Aix- en-Provence, France

Friday 24 April - Association Day 15:20 Coffee break 9:45 Day’s chairmen Welcome Address 15:40 Women in Global Finance Vincent Derudder, Honorary Chairman of FECIF • Do women have a different view on Finance or Economy? Zoltan Luttenberger PhD • Are there special attributes distinguishing female financial advisors? 10:00 Client decisions on Investment Strategies during Confirmed Speakers: the «New Normal»: Active or Passive, DIY or Advised or Discretionary? Vania Franceschelli, Executive Committee Member of ANASF,Italy • Fiat money system, Product Transparency Marta Gellova, EFPA Czech Republic, Prague Confirmed Speakers: Susan Jordan BSc, Transition Expert, UK Thomas Abel CFP, President of NFPB Network Financial Planners Berlin, Germany Andrea Slattery, CEO, SMSF Association, Australia Peter Brooke, Financial Planner and Investment Team Stra- tegist, The Spectrum IFA Group 16:30 What can financial advisors expect from their asso- Jens Brunke, Director for Portfolio Management & Com- ciations to support them in turbulent times? pliance, CM Equity AG, Germany Confirmed Speakers: Giorgio Canella, EFA, Fee for Service Financial Life planner, Italy David Charlet, Chairman ANACOFI, France Tino Leukhardt, Precious Metal specialist, Ophirum Group, Lubomir Christoff PhD, ChFC, Member of the Securities Germany Markets Stakeholder Group at ESMA Johannes Muschik, Chairman AFPA, Austria Martin Klein, CEO VOTUM, Germany Josep Soler-Albertí, EFPA Chairman, Spain 10:50 Self Managed Superannuation Funds in Australia • The Australian Pension System 17:20 Summary of the Day • The success of the «super funds» www.cifango.org 17:30 End of the Forum ______TRUSTING N°7 – January/June 2015 9 CIFA’s FORUM 2015 / Registration Form

REGISTRATION FORM XIIITH INTERNATIONAL CIFA FORUM MONACO, 22-24 APRIL 2015

InformatIon and regIstratIon Are you an active member of one of CIFA’s partner associations?  Yes  No

CIFA (Convention of Independent Financial Advisors) If yes, which one? Rue du Vieux-Collège 3 P.O. Box 3255, 1211 Geneva 3 Last name First name Tel: +33 9 82 46 34 66 Fax: +41 22 786 34 35 Function Company Mob: +33 6 80 65 95 23 Email: [email protected] Address www.cifango.org Postal Code City Country regIstratIon polIcy and payment When your registration form is received, your Tel. Fax E-mail credit card will be charged for your registration Date Signature fees and an invoice will be sent to you by Aurore Laugier EURL, in charge of the YES I wish to register for the XIIIth International Forum of the Convention management of the CIFA Forum. Substitutions of Independent Financial Advisors (CIFA) and I choose: within the same company are accepted with  Forum 22-23-24 April  Forum 22 & 23 April  Forum 24 April CIFA’s agreement. accommodatIon fees (Vat Included) Forum 22-23-24 April 1,500 € Hôtel Hermitage Forum 22 & 23 April 1,200 € Room Classic Single breakfast included per night 240 € Forum 24 April 300 € Room Classic Double breakfast included per night 267 € Suites (price communicated on request) Active members of partner associations: 50% discount To make your hotel reservation at the Hôtel Hermitage, please click the link below: The donors dinner of April 23rd will be reserved https://resa.mci.mc/cifa2015/ for the donors and their guests. After 22 March 2015, reservations will be made subject to availability and current prices. refund polIcy After 22 March 2015, it will not be possible to cancel your reservation. A cancellation fee of 50 % of the invoiced  I do not need a Hotel reservation. amount applies for all cancellations. No refunds for any cancellation received after 31 March payment 2015. your credit card number and expiration date must be given as a warrantee of payment. Hotel reserVatIons I wish to pay by:  Credit card  Bank Transfer Credit card payments will be debited immediately upon receipt of card details. CIFA has arranged for group rate bookings of rooms at preferential prices. payment by credIt card

congress’ dates and Venue  Mastercard  VISA  AMEX Wednesday 22, Thursday 23 Card No Expiry Date and Friday 24 April 2015 Hôtel Hermitage, Square Beaumarchais Name of card holder 98000 Monaco Tel : + 377 98 06 40 00 Address of AMEX card holder

CIFA reserves the right to change the programme or the hotel reservation if, despite their best efforts, circumstances force them to do so. www.cifango.org ______10 TRUSTING N°7 – January/June 2015 CIFA’s FORUM 2014

______TRUSTING N°7 – January/June 2015 11 CIFA’s MILESTONES / 2015: UN Category I “General” Consultative Status

CIFA’s NEW ADVISORY ROLE AT THE United Nations By Me François LORIOT

In January 2015, the UN/ECOSOC recommended elevating CIFA’s consultative status to the Category I (General), a prestigious level which is granted to only a handful of international organizations worldwide. This article describes the context and rationale which led to this important recognition of CIFA’s contribution to the United Nations’ work and objectives.

The 1945 Charter of the United Nations UN has decided to create 3 groups of to the achievement of the objectives called on competent international non NGOs for accreditation purposes: of the United Nations in fields set out governmental organizations (NGO) to in paragraph 1 above, and are closely — Category I (General), involved with the economic and social make “arrangements for consultation” — Category II (Special), and life of the peoples of the areas they rep- with the ECOSOC on “solutions of inter- — Category III (Roster). resent and whose membership, which national economic, social problem… should be considerable, is broadly representative of major segments of on standards of living, full employ- In early 2014, there was a total of 3900 ment and conditions of economic and society in a large number of countries NGOs which had then received ECO- in different regions of the world shall social progress and development … SOC accreditation in its 70 years of exis- be known as organizations in General with a view to the creation of stability tence, but only 147 organizations had consultative status. and well-being which are necessary for a Category I accreditation, which we (ECOSOC/Res/1996/31) peaceful and friendly relations between now refer to as the “General consulta- nations” (art. 55 and 71). tive status” (source: E/2013/INF/6). In articles 23-24 of the same 1996 ECO- SOC resolution were described the In 1946, it will be noted that the first conditions for NGOs with “Special” international organization to be ac- The meaning of “General” and with “Roster” status which carried credited with a general consultative consultative status at ECO- less stringent requirements, weight and status by the UN/ECOSOC was the In- SOC/UN (Category I) prestige (formerly called Category II and ternational Chamber of Commerce. In Category III). the United Nations’ first decades civil In 1996, in order to clarify its different society organizations and NGOs where consultative status, the ECOSOC adopt- In 2007, CIFA was accredited in Catego- less involved in the Organization’s ac- ed a resolution which established the ry II (“Special” consultative status). tivities. Since the 90’s, NGOs became conditions required for each category, more active at the international level and it specified for its Category I“Gen - and sought an increased participation eral” consultative status: CIFA’s advocacy role since its in the UN decision-making processes 22. Organizations that are concerned 2007 accreditation with UN/ and conferences. In 1996, with more with most of the activities of the ECOSOC NGO’s expressing interest for UN con- Council and its subsidiary bodies and can demonstrate to the satisfaction of During the last 8 years since 2007, CIFA ference and project participation, and the Council that they have substantive was very active at ECOSOC and world- for operational purposes, the ECOSOC/ and sustained contributions to make wide by supporting and promoting

______12 TRUSTING N°7 – January/June 2015 2015: UN Category I “General” Consultative Status / CIFA’s MILESTONES

within the financial community the Agenda and Strategies”. Recom- tative status” and considering CIFA’s 8 Millennium Development Goals mendations on how to increase Public- availability to produce more substan- (MDG), as well as the UN Develop- Private-Partnerships (PPPs) with the UN tive contributions to the United Nations ment Agenda. In addition, CIFA pre- in order to be able to implement the and ECOSOC debates, CIFA decided to pared and submitted consultative re- SDGs were suggested and invitations submit a 14-page proposal to the ECO- ports, organized international forums to attend the World Investment Fo- SOC seeking a Category I status (Gener- on finance and held meetings with rum (Geneva) and the Third Confer- al). ECOSOC’s NGO Committee initially UN delegates in New York and Geneva ence on Investing for Development reviewed CIFA application during its 19- on partnership initiatives aiming to (Addis Ababa) were made by UNCTAD 24 May 2014 resumed session, where increase the involvement of the finan- and ECE, respectively. all CIFA activities, objectives, budget cial community in the preparation of As required by its “Special” consultative and reports were carefully scrutinized, Sustainable Development the new status, CIFA has also produced qua- in order to ensure that it met conditions Goals and of the Post-2015 UN De- drennial reports to the ECOSOC where for a Category I status (General). At the velopment Agenda. In November it described the substance of each of its conclusion of these deliberations, the 2013, to further these partnership ini- Annual Forum held in Monaco. Every NGO Committee raised three (3) ques- tiatives with the UN, a joint work ses- year, CIFA also contributed a position tions for CIFA: sion was held at UN headquarter with paper on the selected themes of the 1- Why would CIFA feel the need to members of the UN Forum for Small ECOSOC’s Annual Ministerial Re- change its category of consultative States (FOSS), followed in April 2014 view (AMR). status from “Special” to “General”? by CIFA’s conference held during the Joint ECOSOC-General 2- Why did the current special- Assembly Session on SDGs ized status prevent CIFA from aiming to promote “Partner- Why would CIFA feel the need carrying out its activities further with ECOSOC? ships for Development”. In to change its category August 2014, at the 6th Annual 3- Does CIFA limits its work only Forum of the UN Alliance of of consultative status to certain specialized area? Civilizations (UNAOC), CIFA organized in Asia a roundtable from “Special” to “General”? Before answering these ques- of experts to exchange on the tions, CIFA observed that in its “Contribution of investors 70 years of existence the UN/ and of the financial sector to ECOSOC had granted the Cat- sustainable development, in a con- Unfortunately, under ECOSOC rules, egory I (General) status to only 147 text of cultural diversity” which rec- these CIFA reports and documents to organizations worldwide. Hence, CIFA ommended a greater involvement of the UN/ECOSOC were constrained by leadership undertook with external ex- the private sector in achieving the new a statutory 500-word limit imposed perts familiar with the United Nations Sustainable Development Goals on NGOs holding “Special consulta- a thorough analysis of the UN legal (SDGs) of the United Nations. tive status”. Although CIFA represen- framework and of the context in which tatives participated each year to the ECOSOC had been operating in past de- In January 2015, in Geneva, togeth- ECOSOC annual sessions, CIFA’s “Spe- cades, including under which substan- er with Members of the Board of cial” status did not allow substantive tive and political circumstances the UN/ “Groupement Suisse des Conseils ECOSOC had granted so few Category I en Gestion Indépendants” (GSCGI) contributions and interventions during (General) accreditations. and “Fédération Européenne des ECOSOC sessions and debates where Conseils et intermédiaires Finan- key financial and economic issues were Through its preliminary review and ciers“ (FECIF), CIFA organized another raised. CIFA position papers with their analysis, CIFA realised that it was es- work session with UN High officials at 500 words limitation could barely cover sential to convince and demonstrate the Palais des Nations in Geneva on the complex agenda of issues of inter- clearly to UN Member-States that the the topic of “The Financial Sector’s est for ECOSOC members. following basic criteria were met, as Partnership and Contributions In 2013, in view of the foregoing restric- required for a Category I (General) ac- to the Post 2015 Development tions on NGOs with “Special consul- creditation:

______TRUSTING N°7 – January/June 2015 13 CIFA’s MILESTONES / 2015: UN Category I “General” Consultative Status

a- CIFA’s legal, independent and non- vestments, invested in a MDG and CSR – Submit substantive 2000-word re- profit operational status ethical context. This unique feature of ports to ECOSOC on the general eco- CIFA’s partnership worldwide distin- b- Worldwide Networking and Mem- nomic and social issues (instead of guishes it from other private banking bership by CIFA 500-word), which would be of direct unions, which often operate without interest to the Post-2015 UN De- c- General contributions and activities any humanitarian reference. In addi- velopment Agenda linked with UN & ECOSOC tion, CIFA is composite by nature com- – Provide support, agenda items and plementing the role of traditional In- d- Substantive studies and publica- technical assistance to the ECOSOC ternational Chambers of Commerce as tions of general interest by CIFA for its annual Joint Session with well as that of an international associa- Bretton Wood institutions, con- e- CIFA’s linkage with some specific tion of economists. All CIFA worldwide cerning urgent social and macro- UN/ECOSOC agenda items partners are actively involved in con- economic global issues related to crete economic investment decision- f- Multi-sectorial nature of CIFA’s ac- investments in developing countries tivities and programmes making worldwide. – Participate to the substantive ECO- CIFA explained that its current “Spe- On 20 September 2014, after thorough SOC sessions where CIFA representa- cial” consultative status currently al- analysis and consultations, the CIFA tives would be allowed to propose lows only for a limited contribution to secretary-general submitted a new re- Agenda items and speak on priority ECOSOC’s Annual Program of Work, port responding to ECOSOC queries. economic, social, financial and in- with no possibility to adduce CIFA’s This CIFA submission to ECOSOC was vestment issues. complemented with various studies substantive reports and interventions and publications, such as CIFA annual which could enlighten ECOSOC mem- Forum reports, its TRUSTING magazine, bers on the current world investment The “universal” nature of CIFA’s etc. The main lines of arguments and environment and problems. If CIFA activities as its key feature the rationale to justify awarding CIFA was to be granted with a Category I with “General consultative status” “General” consultative status, CIFA The Convention of Independent were developed around the following would aim to: Financial Advisors (CIFA) was presented as a Swiss incorporated non- features: – Discharge a more significant and profit Foundation, which actively pro- The rationale for upgrading CIFA proactive role within ECOSOC Plan vides global financing counseling in all status at the UN to Category I of Work, including in its High Level social and economic sectors, with its (general) Policy Committee, and therefore... network of 70 national, supranational CIFA was described as a worldwide – Propose relevant work Items for the or international Associations or Federa- network of partners involved in global ECOSOC Agenda related to trends tions, representing an excess of 750,000 trade, an organization tantamount to and threats facing the social and financial advisors, which represent 20% a union of development bankers, with economic environment as it relates of worldwide investments. The CIFA responsibility for over 20% of global in- to global investments global financing counselingis governed by and aligned on the Basic ECOSOC Program of Work (UN doc: E/2013/1 of 21-12-2012). To this end, the invest- The Convention of Independent Financial Advisors ment guidance and counseling offered in social and economic fields by CIFA (CIFA) to its network, draws on the whole UN Development Agenda, on the UN a Swiss incorporated non-profit Foundation Millennium Development Goals (MDGs) and on major research studies actively provides global financing counseling from the United Nations’ 5 Economic Commissions (ECE, ECLAC, ECA, ESCWA in all social and economic sectors and ESCAP) as well as from UNCTAD, from WTO and from the Bretton Woods

______14 TRUSTING N°7 – January/June 2015 2015: UN Category I “General” Consultative Status / CIFA’s MILESTONES

institutions. CIFA also champions with aim to benefit Society and Humanity as minded by CIFA to expand beyond the other regional research institutions a whole, through job creation, women micromanagement of enterprises and world economic growth based on and youth empowerment, community of micro-economics, and to become youth job creation, on social develop- enrichment, entrepreneurial spirit, in- active partners with the ECOSOC and ment, on wealth benefits for the whole novative technologies, ecological pro- in the UN Post 2015 Development community, with a special emphasis on tection, rule of law and capital safe- Agenda. Corporate Social Responsibility (CSR). guards. By their very nature, and as a matter of In its 2014 report to ECOSOC’s NGO What obstacles have been pre- efficiency, it was explained to ECOSOC/ Committee, CIFA also recalled that dur- venting CIFA from fully carry- NGO Committee, that world investors ing the 2000 bubble as well as in the ing out its current activities recent financial crisis of 2008-9, one of will usually privilege a global approach with ECOSOC/UN? on mankind’s problems, including a the main criticism addressed against universal vision of current political, the economic and financial sectors In its 2014 submission to ECOSOC NGO social and economic issues. In our cur- where their secrecy and individualistic Committee, the CIFA report proposed rent global economy and social con- profit-minded approaches. One of CI- to bring a more efficient support to text, a narrow approach the ECOSOC Program of Work, to the in financial investments Annual Ministerial would be counterpro- Review (AMR) and to ductive and risky for The missions and objectives of CIFA the UN Development both society and for Agenda, by providing investors. Hence, finan- are general and universal in nature. studies and reports of cial advisors and deci- Its membership’s investments cover all aspects up to 2000 words, in- sion-makers are usually stead of the current 500- compelled to maintain of the world economy and human challenges, word limit imposed by a holistic approach its “Special consulta- for investments which including major geopolitical considerations. tive status”. takes into account the As explained above, the community benefits, missions and objectives their environmental impact, the social of CIFA are general and universal in na- FA’s objective is precisely to encourage ethics, public health, the corporate so- ture, and its membership’s investments financial decision-makers to reach be- cial responsibilities, including human cover all aspects of the world economy yond these traditionally individualistic rights, justice and peace, such as man- and human challenges, including ma- and narrow approaches, and to open dated by the 2000 UN Millennium their minds and actions to the larger UN jor geopolitical considerations. In such Declaration. social and economic Agenda proposed context, a 500-word limit imposed for specialized NGOs did not suit the wider As a result of the above features, CIFA’s by the ECOSOC Program of Work, fields of interests covered by CIFA, and work, studies and recommendations by the MDGs, including corporate so- did not lend themselves to substantive are of general and universal interest, cial responsibility and/or community submissions which can properly en- as they address in the first place Man- investments through the promotion of lighten the ECOSOC members. Hence, it kind’s progress and wellbeing issues entrepreneurship and private initiative. was submitted to ECOSOC’s NGO Com- within the larger scope proposed in Such a change of mindset in the global mittee that should CIFA be authorized ECOSOC Program of Work and by ar- investor world proposed by CIFA can to submit 2000-word reports, it would ticles 55 & 71 of the UN Charter. In such only be achieved through an overhaul then be able to provide more signifi- general and holistic context, CIFA’s mis- of past financial practices, and by the cant and substantive contributions to sion does not limit itself to a specific recognition that investors must de- the ECOSOC Program of Work and sector of financial investments or in the velop an overall view of societal and activities. defense of some “specialized” interests of macroeconomic challenges in their or of individual profits. Instead, CIFA’s larger general significance for Human- Through its huge global network, CIFA network actions and decision-making ity; financial advisors are, therefore, re- is in a unique position to offer excep-

______TRUSTING N°7 – January/June 2015 15 CIFA’s MILESTONES / 2015: UN Category I “General” Consultative Status

tional economic data and social infor- involved in all regions of the world. CIFA Committee session, while its agenda mation to ECOSOC on the approaches is involved in all aspects of contempo- was upset by heavy snowstorms which and impact of financial investments rary social issues and macro-economic shut the whole city and UN headquar- in the world’s different regions, in the problems, including their geopolitical ters in New York for one day, informal global economy’s different sectors aspects. deliberations nevertheless continued and on their social benefits for all the with the remarkable support of the communities involved. Such CIFA re- UNDESA/NGO Branch officials who reports could also take the form of eco- UN deliberations on CIFA’s ap- mained very active. nomic and business statistics which plication for “general” consultative status It is worth noting that, on this NGO are unavailable elsewhere, and they Committee session’s Agenda, only 3 ap- will shed more light on the social and The UN/ECOSOC’s NGO Committee met plications sought a reclassification from economic progress or problems facing at New York Headquarters from 26 Jan- “Special” to “General” status, including the world. In view of its general insider uary to 5 February 2015 to consider the CIFA’s application. knowledge on global investments, CIFA application. The CIFA Secretary On 2 February 2015, after a thorough CIFA is also in a position to propose in General, Mr. J.P. Diserens attended the review of the CIFA Application, the NGO the ECOSOC Agenda the insertion of NGO Committee session, assisted by Committee unanimously recommend- new priority Items which, besides be- experts who were familiar with the UN/ ed that CIFA be granted Category I ing very informative, will contribute to ECOSOC legal framework, proceedings status (General), and this recommen- ECOSOC’s Program of Work and to a and procedures. Copies of the recent dation is tabled for endorsement at the better knowledge of what are the new TRUSTING magazines were distrib- ECOSOC Coordination Segment and prospects and perspectives in world uted to the NGO Committee members, Management session scheduled for finance and investments. This option and web access was provided to them 8-10 April 2015. is currently not available under CIFA’s on various CIFA documents and studies. current “Special” consultative status at Information contacts were also made ECOSOC which, in addition, does not with some NGO Committee members Impact & follow up on CIFA’s allow CIFA to speak and to contribute to ensure that they possessed all key new General consultative sta- agenda Items as an observer during data. the ECOSOC meetings. tus at ECOSOC During its January 2015 session, the With its Category I General consultative In conclusion, CIFA’s work is not con- NGO Committee operated under refined in its purpose, but multi-sec- status, CIFA has the outstanding privi- fined working methods, in a very pro- lege to sit at the same table and to par- torial, which explains why it should fessional fashion considering its very have general consultative status. ticipate with other world major players heavy agenda, which included 177 new to the solution of global financial, social CIFA cannot be characterized as a “spe- applications for “Special” status, plus and economic problems. In this Catego- cialized” NGO, in view of the general 153 other applications deferred from ry I General consultative status we find nature of its network’s investments and previous sessions and a review of 210 other distinguished international orga- of the global partnerships in which it is quadrennial reports. During the NGO nizations, such as the International Chamber of Commerce, the Union of Arab Banks, the International On 2 February 2015, after a thorough Economists Association, and many others with whom CIFA will be able to review of the CIFA Application, share valuable expertise and information in the future. the NGO Committee unanimously recommended CIFA’s oncoming 2015 Forum in Mona- co will constitute an excellent opportu- that CIFA be granted nity for its participants to celebrate this new “General” consultative status at Category I status (General) the United Nations, by proposing and adopting various measures which will

______16 TRUSTING N°7 – January/June 2015 2015: UN Category I “General” Consultative Status / CIFA’s MILESTONES

outline CIFA’s contributions towards and global partnership for and information on their prevailing “solutions of international econom- sustainable development economic and financial situations ic, social problem…on standards of which, in return, will feed CIFA’s con- living, full employment and condi- b- Likewise CIFA should identify and tributions to the ECOSOC. tions of economic and social prog- propose specific linkages with Items on the UN/ECOSOC Agenda for the ress and development …with a CONCLUSION view to the creation of stability and next Biennium, where it could con- well-being which are necessary for tribute its own specific items on the The CIFA Leadership and the CIFA Mem- peaceful and friendly relations be- Agenda, interventions, position pa- ber of the Executive Committee head- tween nations” (UN Charter art. 55 and pers and studies. ing the Commission on UN-ECOSOC 71). In this context, the following pro- c- CIFA will now be allowed to actively and Agency Liaison, must be com- posals should be considered for future participate and speak at the annual mended for their present and past con- action by CIFA: ECOSOC work sessions, including at tributions in helping resolve major fi- its ministerial High Level Policy nancial, social and economic problems a- CIFA must actively define its contri- confronting the world. It must also be butions and activities linked with Committee and at the annual IMF- WBk-ECOSOC Joint Session with congratulated for accepting to cope the UN & ECOSOC programmes and with the huge challenge, which its new objectives, such as the new Sustain- Bretton Woods institutions (scheduled this year on 20-21 April 2015). “General” consultative status will repre- able Development Goals (SDGs) CIFA should identify and propose se- sent in the future for all Humanity. and the Post 2015-Development lect items for these annual meetings’ Agenda which will replace the 8 We also wish to thank the 19 Member- agendas where it can submit sub- MDGs adopted in 2001. Of particu- States Delegates and the Chairperson, stantive finance and economic re- lar importance and interest for CIFA participating to the ECOSOC NGO Com- ports and position papers, and speak are the new SDG number 9, 12 and mittee and the UNDESA/NGO Branch on select items on their Agendas. 17: staff members and the OIC, for their d- CIFA’s reports and submissions will dedication and professionalism in fa- 9. Promote sustainable indus- no longer be limited to 500 words, cilitating the access of and welcoming trialization but will be extended to 2000 words. civil society participation at the United 12. Promote sustainable con- Nations, such as that of the “Conven- e- CIFA must continue to actively de- sumption and production tion of Independent Financial Ad- velop and support its worldwide patterns visors”. network of financial advisors at 17. Strengthen and enhance the the regional level, in order to draw means of implementation from these regions valuable data Me François LORIOT

Me François LORIOT, Member of the Bar, Docteur d’État in Inter- national Law (Paris), Attorney active before the United Nations Tribunals and Appeals Court. Legal Advisor to various international NGOs with observer or consultative status at the United Nations and in International Organizations. Former Principal Legal Advisor on Justice and Accountability at the United Nations, and Chief of Legal Sector at UNDP, UNFPA, UNOPS, UNV.

______TRUSTING N°7 – January/June 2015 17 LEGACY MACHINE No 1

UNIQUE FLYING BALANCE WHEEL AND VERTICAL POWER RESERVE COMPLETELY INDEPENDENT DUAL TIME ZONES PLATINUM 950 ALSO AVAILABLE IN 18K WHITE GOLD OR RED GOLD 279 COMPONENTS / 23 JEWELS LIMITED EDITION OF 33 PIECES IN PLATINUM

FOR INFORMATION AND WORLDWIDE RETAILERS : WWW.MBANDF.COM

LM1_PT_595x830_TRUSTING_13.02.15.indd 1 13/02/15 09:32 UNOG-day / CIFA’s SPECIAL EVENTS

The Financial Sector’s Partnership and Contributions to the Post 2015 Development Agenda and Strategies Thursday, January 15, 2015: UNOG day hosted by CIFA (www.cifango.org), Venue: Palais des Nations, Geneva. Room XXIII, E Building / 10:00am to 12:30pm FECIF—(www.fecif.org) and GSCGI-SAIFA –(www.gscgi.ch) are invited by CIFA (www.cifango.org) to attend a meeting at the United Nations in Geneva with UNOG’s High Officials PRELIMINARY PROGRAM Main Topics: Along with UN post-2015 development agenda and ECOSOC 2015 themes: I. Managing Goals to sustainable development goals: What will it take? II. Strengthening integration implementation and review — the high-level political forum on sustainable development after 2015. Following topics will be addressed: — World economic institutions and prospects; — Preparation for ECOSOC’s 2015 meeting with Bretton Wood institutions, WTO & UNCTAD; — How independent financial advisors (IFAs) can help in mobilization of financial resources and their effective use for partnerships in sustainable development. The event includes a UN visit and a Luncheon.

UNOG’s High Officials CIFA’s Speakers — Collaboration of the Private sector in — Mr. Christian Friis Bach, Under Secretary achieving the SDG’s 17 points Jean-Pierre Diserens, CIFA’s Secretary- General, Executive Secretary UNECE (confirmed) General, FECIF’s Board Member — Poverty can be beaten, not Hatred Pierre Christodoulidis, President of CIFA, — Mr. Joerg Weber, Deputy Director, Investment Founder, Honorary President and Board Member of GSCGI-SAIFA and Enterprise Division, UNCTAD (confirmed) — The EU and the Financial Services – 15 years after the launch of the EU Finan- cial Services Action Plan Vincent J. Derudder, Founder & Honorary * * * Chairman of FECIF, Chairman of FECIF Consultative Committee — Private means to public aims Event moderated by: Yves Nidegger, Conseiller National, Membre de la Commission Juridique et de la Commission Judiciaire au Parlement à Berne — Hanifa Mezoui, PhD, Chairperson UN Affairs, — How a Universal Fiduciary Duty of Fi- ECOSOC and UNCTAD nancial Advisors helps building a Better World? Zoltan Luttenberger, PhD, CIFA’s Executive Board Member, Founding Chairman & Member of the Board of HAQFP (Hungarian Association of Qualified Financial Planners) — Closing Remarks Cosima F. Barone, CIFA’s Executive Board Member, Board Member & Director of GSCGI-SAIFA

______TRUSTING N°7 – January/June 2015 19 CIFA’s SPECIAL EVENTS / UNOG-day

UNOG’s High Officials

Mr. Christian Friis Bach (right)

Mr. Joerg Weber (left)

In her opening remarks, Hanifa MEZOUI (PhD, Chairperson UN Affairs, ECO- SOC and UNCTAD) updated the audience about the UN 2015 agenda, having already announced three main priorities: 1. Final push to achieve the MDGs 2. New Development Agenda SDGs 3. Climate Change In fact, the 69th Session will be about: “Delivering on and implementing a transformative Post 2015 Development Agenda” Therefore, 2015 will be a very important year for the UN in many ways: - 70th anniversary of the UN - 15 years of the MDG Financing the post-2015 agenda (SDGs), based on public-private partnerships (PPP), proached from three important angles: ployment. Environmental, including has taken center stage. PPP have in- social, economic and environmental. biodiversity along with maintaining deed been considered within UN pro- Social, because inequality and social ecosystem services critical for Sustain- grams over the last 15 years, but have exclusion are widening. Economic, able Development, and recognizing not yet effectively taken off the ground. because of slow economic growth, not traditional communities (indigenous Sustainable Development: can be ap- enough decent work and rising unem- people and local communities).

______20 TRUSTING N°7 – January/June 2015 UNOG-day / CIFA’s SPECIAL EVENTS

Sustainable Development, based on trillion per year. That is why the effort nium Development Goals (MDGs) after PPP, is the proper answer to the spread- must be public and private, for neither 2015, Dr. Weber mentioned that the ing violence and conflicts across the states nor private investors could come task ahead is daunting. The United world and to enhance a cross-cultural up with such financial resources on Nations Conference on Trade and De- dialogue worldwide. their own. The climate fund set up by velopment (UNCTAD) has assessed the The identified conditions for Sustain- Denmark is a good example that pub- financing needed, especially in the de- able Development and progress are lic-private partnerships are the solution veloping countries, in order for SDG to precisely summarized by the word for SDGs to be achieved. The financial be implemented. The financing gap, as SMART, i.e., Specific, Measurable, At- resources do exist. Sovereign funds, identified by UNCTAD especially for the tainable, Relevant and Time-bound. pension funds, etc. represent a great SDG-sensitive sectors in the developing Future action and deeds must, there- pool of money (approximately $45 tril- countries, amounts to $4.5 trillion per fore, be smart! The UN General As- lion) that could indeed be channeled at year over the period 2015 to 2030. But, sembly, along with the World Bank, the least partially towards achieving SDGs developing countries face an annual ILO and other global UN and indepen- and eradicating poverty across the gap of $2.5 trillion per year Therefore, dent agencies, is committed to a major world. reflecting on policies to raise the share of private-sector participation (PPP) will brainstorming to take place during the Mr. Friis Bach went on with specific and help narrowing this gap. current year (several events are already very detailed examples of past initia- scheduled). This major budgetary ex- tives (water-related and others as well), Fortunately, FDI flows have returned to ercise is expected to provide specific which have been successful, such as in growth after the 2012 slump. UNCTAD insight on how to finance the SDGs, as the Philippines, Nepal, etc. projects that FDI flows could rise to well as a proper framework to imple- $1.6 trillion in 2014, $1.7 trillion in 2015 Undoubtedly, concrete public-private ment the SDGs goals. CIFA is expected and $1.8 trillion in 2016, with relatively partnerships can be developed, as they to contribute its insight about PPPs. larger increases in developed countries. have proven to be indeed successful in In LDCs (least developed countries) the Then, Ms. Hanifa Mezoui introduced the past. Mr. Christian Friis Bach (Under financing needs are particularly acute He concluded by welcoming insight Secretary-General, Executive Secretary and challenging, as their financing ca- and advice from CIFA and the financial UNECE), who served in Denmark as pacity is the lowest. community represented in the room by Minister for Development Cooperation SDGs aim for poverty reduction, food FECIF and GSCGI/SAIFA. He invited CIFA (2011-2013) and as a Special Advisor security, human health and education, to participate at the 20th of March 2015 to the European Union Commission UN preparatory conference in Geneva climate change mitigation, and a range for the United Nations Global Sustain- focused on the SDGs’ financing. His fi- of other objectives across the econom- ability Panel (2010-2011) prior to being nal words were: we need investments ic, social and environmental segments appointed (10 July 2014) to the current and we need partnerships! of the global economy. However, fra- position at UNECE. gility in some emerging markets and Ms. Hanifa Mezoui introduced the next risks related to policy uncertainty and Mr. Friis Bach explained the highly am- speaker, Dr. Joerg Weber (Deputy bitious agenda, adopted by UN, aiming regional instability might discourage Director, Investment and Enterprise Di- FDI inflows and investments. at agreeing on Sustainable Develop- vision, UNCTAD) who is currently the ment and at eradicating poverty by Officer-in-Charge of the International The economic, social and environmen- 2030. It is a historic moment for the Arrangements Section in UNCTAD, re- tal challenges are global. They require, UN and the world. Ours is the first gen- sponsible for implementing the work therefore, a global effort. The role of eration ever to heartily embrace such of the organization on international the public sector is fundamental and a mission. Substantial investments investment agreements. Dr. Weber pivotal. Equally, the private sector con- are needed across the world: in people joined the UN in 1990 and has been tribution is indispensable. The financ- and in infrastructure. People should with this program since its inception in ing of SDGs by the private sector is cur- be put “first”, he added. Concerning 1998. rently relatively low, as only a fraction of infrastructure, investments in water, the worldwide invested assets of banks, energy, telecommunications, etc. have As the Sustainable Development Goals pension funds, insurers, foundations been estimated to amount to $5-$7 (SDGs) are set to replace the Millen- and endowments, as well as transna-

______TRUSTING N°7 – January/June 2015 21 CIFA’s SPECIAL EVENTS / UNOG-day

tional corporations, is in SDG-sensitive turn to IFAs, rather than to large banks 6. The intermediaries are the ideal sectors. For SDGs’ goals to be achieved, (UBS, Crédit Suisse, Deutsche Bank, etc.), channel for new products and ser- a lot depends as well on policymakers when willing to direct their investments vices because of the special atten- across the globe. They need to find the towards sustainable development. It is, tion they get from the public. therefore, a huge opportunity for finan- right balance between creating a favor- 7. EU consumers would rather invest cial intermediaries (i.e., private entrepre- able framework for potential private in long term vehicles, financing the neurs) across the world to participate in investors and, concurrently, remove real economy than in highly specu- SDGs and work for the good of people. barriers to investment while protecting lative products – this is the position public interests through regulation as Interestingly enough, the human factor also of the consumers’ associations well. A balanced risk/reward situation, (mentioned earlier by Mr. Friis Bach when and the intermediaries; unfortu- sufficiently appealing to private inves- he stressed how important it is “to put nately, the EC regulatory environ- tors, is as important as guaranteeing ac- people first”) was also discussed by Mr. ment is more favorable to large in- cessibility and affordability of services Vincent J. Derudder (Founder & stitutions and to speculative / short for all worldwide. Policymakers must, Honorary Chairman of FECIF, Chairman term investment. therefore, provide SMART (!) regulation of FECIF Consultative Committee) intro- 8. In order to facilitate a re-launch of in order to help achieving the SDGs by duced right after by Hanifa Mezoui. 2030. In his closing remarks, Dr. Weber the economy it is advisable to sup- encouraged CIFA to participate in the The EU and the Financial port long term investments and the works of the World Investment Forum Services: 15 years after the role of intermediaries remunerated headed by UNCTAD. launch of the EU Financial on the basis of long term retroces- Services Action Plan sions – as it is a political matter, the Hanifa Mezoui, recognizing how clearly The title of Mr. Derudder contains the role of the UN to raise those issues Dr. Weber explained the dimension of across the planet is crucial. the SDGs post-2015 financing needs, key point (the human factor) on which went on introducing the next speak- his remarks lied, resumed in the follow- Therefore, the PPP (public-private part- er, Mr. Jean-Pierre Diserens ing insightful information about the EU nerships) can be well served by the key (CIFA’s Secretary-General, FECIF’s Board financial intermediaries’ industry: role of IFAs. They are “intermediaries”, Member), the first of the private sector 1. The EU FSAP – a single market of the sitting right between consumers and speaker of the day. Mr. Diserens, focus- financial services – aimed at increas- sustainable development projects. But, ing his intervention on the: ing cross border transactions for EU for IFAs to fully participate in SDGs, EU and global policymakers should re- COLLABORATION OF THE PRI- financial products & services. frain from over-regulating the sector. VATE SECTOR IN ACHIEVING THE 2. The role of the financial interme- Intermediaries should be reasonably SDGs 17 POINTS diaries: distribution of EU financial remunerated for their work so vital to ...genuinely recognized that, if MDGs products and services, between the global economy. Along this aspect, failed, the main reason was that the fi- 20% and 60% of market share. he noted that former EU Commissioner nancial aspect had been ignored when 3. The intermediary: 37% of the EU Michel Barnier and former EU President the UN identified these global goals. consumers prefer to deal with an in- Mr. Barroso erred in many ways. For in- IFAs have a privileged position within termediary rather than directly with stance: (1) they had the big ambition the global asset management indus- an institution or through the Inter- of banning retrocessions for intermedi- try, as they meet directly, eye to eye, net – the human factor. aries, and (2) they failed to launch the with investors. Consequently, they can planned “Long-Term EU Investment inspire their customers willing to put 4. The different types of intermediary: Directive” which remained in the EU their savings to use for long-term proj- agents (exclusive or non-exclusive), drawer of dormant “drafted“ projects ects along the sustainable develop- brokers and consultants. instead. Without proper remuneration, ment goals identified by the UN. CIFA 5. The number of intermediaries in little incentive is left then for interme- is federating, through IFAs’ national Europe: 500,000 licensed by EU diaries to participate in long-term and associations across the world, about regulators plus 700,000 other pro- sustainable development projects. one million of financial intermediaries. fessionals advising EU consumers – Nowadays, there is hope in Brussels Potentially, investors are more likely to 2,000,000 back office personal. that President Juncker will be able to

______22 TRUSTING N°7 – January/June 2015 UNOG-day / CIFA’s SPECIAL EVENTS

guide the European Commission and various actors of the economy. In that same vein, financial resources EU policymakers towards “lighter and At the 64th meeting of Nobel Laureate tend to be concentrated among the better regulation”. in Lindau – meetings held since 1951, now well known “TBTF-or systemic fi- Hanifa Mezoui then turned the mike to after the war, between Nobel laureates – nancial actors” inexorably leading to a one of the founders of CIFA, Mr. Pierre the main topic discussed was precisely deep social split between the groups of CHRISTODOULIDIS (President of “inequality”. rich people and the “new poor”. CIFA, Founder, Honorary President and In his book, Piketty is openly concerned The discontent and frustration of the Board Member of GSCGI-SAIFA) who in- about the growing inequalities that latter, i.e., the largest in number, gen- troduced the following topic: inevitably lead to less democracy, be- erate a hatred attitude towards the POVERTY CAN BE BEATEN, NOT cause they can create strong social and wealthy, which could lead to a clash of HATRED political tensions, and he stresses that violence proportional to the duration the “inequalities” inherited can threat- and intensity of this phenomenon. The title is provocative on purpose. en and destroy capitalism. Opacity and size go together. The size The Financial Times, symbol of the in- It is clear that the more circle of domi- generates opacity, which in turn en- telligent capitalism, published at the nant forces shrinks due to concentra- courages predation. The more one end of 2012 an insightful analysis of the tion, and its power lies in smaller and grows, the more one tends to take over free-market economy. fewer hands, the more the system in- companies in the same field. Business leaders, expert observers, curs de risk of skidding. This gigantism, contrary to the very economists, politicians and entrepre- Stiglitz explained during the Lindau’s spirit of capitalism, stifles new entre- neurs from around the world comment meetings the forces that lead to an in- preneurial initiatives and condemns on the health of our economic system. crease in inequality while Eric Maskin the system to a certain impoverishment One of the titles selected among this (another Nobel laureate in economics) and a spiral of hatred. long series of articles is «Capitalism in exhibited why global markets have For the moment, there are few signs Crisis». The overall judgment is severe. not reduced inequality in developing showing the politicians’ willingness to It can be summarized as follows: the countries. “Indeed, why respect the fight this trend of gigantism, although “ultra-liberal-deregulated” type of capi- rules of the system, are questioning the recent statements by the Governor of talism inherited from the 1980s failed. protesters if the system creates regu- the Bank of England, may indicate an As such, the market economy has prov- larly new crisis without ever punishing awareness of some leaders about this en not only to be unstable, but and those responsible”. phenomenon. more importantly unjust as well. In our view, there is a constant and poli- This gigantism proceeds based on two “We live in a system which mutual- ticians must have the courage to face coherent logic concepts: first, there is izes losses and privatize profits” says it: wealth creation, derived from the a concentration of wealth and there- Stiglitz. creation of new businesses or finan- fore of power among a smaller number cialization techniques, depends on the of owners, which implies an obvious Physiocrats wanted to reduce debt, information held in fewer hands. The reduction of criminal responsibility of classic mercantilists accelerate growth, number of holders of such information its representatives. Then, we observe and Keynesians reduce unemploy- has naturally shrunken due to the con- more and more of such cases end up in ment. stant consolidation of financial actors the form of settlement agreements, the In the current crisis, we should achieve and this can lead (will lead?) invariably latest being that of Credit Suisse settled the three goals altogether. reactions, of which we do not yet know for US $ 2.6 billion. the nature or extent. In his recent book, “Capital in the Yes but now, Mr. Mark Carney is not a Twenty-First Century”, Thomas Piketty At the same time, it is certain that the politician. He can introduce some pre- and his team did not examine in depth number of “poor” people will increase as emptive guidelines, but it is up to poli- a factor that is growing concern of sci- a result of criminogenic financial prac- ticians and their many expert commit- entists and economists, and especially tices mainly among the urban and often tees to launch / formulate the judicial those awarded Nobel prizes, about well-educated population who have dif- processes that are necessary before it is the increase in inequality among the ficulty finding work opportunities. too late.

______TRUSTING N°7 – January/June 2015 23 CIFA’s SPECIAL EVENTS / UNOG-day

The audience then listened to the next nization, this time around in the field of Considering all these aspects, it is heart- speaker, Mr. Yves Nidegger (Law- finance. Perhaps, he would name it the warming to me seeing an organization yer, Conseiller National, Membre de la “Gold Cross” aimed at responding to such as CIFA, the Convention of inde- Commission Juridique et de la Commis- the human needs caused by economic pendent Financial Advisors, holding a sion Judiciaire au Parlement à Berne), warfare. conference on a topic such as “The Fi- who recalled the “Spirit of Geneva” I recall that, back in the early 1990s, just nancial Sector’s Partnership and Contri- with the following topic: after the demise of the Soviet Union, I butions to the UN Post-2015 Develop- Private means to public aims was to meet with Cornelio Sommaruga, ment Agenda and Strategies”. President of the International Commit- The grand-mother of all Geneva-based Your gathering of concerned profession- tee of the Red Cross from 1987 to 1999, international organizations, namely als in the financial sector is, obviously, together with a member of the Geneva the International Committee of the moved by the spirit of Geneva with the Grand Conseil. We made a proposal to Red Cross (ICRC), was created as - and aim of becoming collectively the Henry him: to organize a worldwide lottery remained - a private humanitarian insti- Dunant of our time. My sincerest hope for the sake of financing the Red Cross tution since its foundation in 1863 by is that CIFA may be the place where the and UN humanitarian programs. The Henry Dunant and Gustave Moynier. International Gold Cross Committee world was to become global. Globaliza- Private means to public aims. will be founded. Then, the goal would tion uncovered needs so huge and so be achieved precisely as suggested by Jean-Henry Dunant was a business massive that the States’ budgets would the title of your conference today. man traveling to Italy in order to meet not be able to cope with. A global chal- The creative insight about fiduciary in- with French Emperor Napoléon III, with lenge was to be addressed with global termediaries was then delivered by Mr. whom he intended to discuss the dif- means. A global lottery, inspired by the Zoltan Luttenberger, PhD ficulties he was facing in conducting perspective of global jackpots, would (CIFA’s Executive Board Member, Found- business in French-occupied Algeria. make the private sector provide the ing Chairman & Member of the Board of He walked incidentally through the necessary financial means where the HAQFP - Hungarian Association of Quali- fields of the Battle of Solferino, an en- States and State organizations would fied Financial Planners), the youngest gagement in the Austro-Sardinian War, be unable to respond commensurately but also highly experienced among all, where 40,000 soldiers on both sides to the surging needs. added Ms. Hanifa Mezoui. He showed died or had been wounded in a single Cornelio Sommaruga declined this some interesting slides highlighting the day. idea because, as he said, the image of following topic: If Henry Dunant were to live today, per- the Red Cross, so pure and clean, would how a universal fiduciary haps would he be shocked again, as a be tarnished if associated to something business man, by the several hundred as villain as a lottery, even though it duty of financial advisors thousands of jobs destroyed, the ago- would have effectively provided pri- helps building a better nizing “working poor” and other trag- vate means to public aims. world? edies mainly caused by unfair trade, Well, Internet was to soon take over He led the audience directly to the es- financial crises and the unsustainable the world, along with all sorts of global sential. Sustainability is not only im- economic development, all happening lotteries massively dragging private portant in terms of “development”, but in a context of prolonged economic means, but for even more private equally important in terms of financial warfare. gains. advice. Again the topic dealt with the “human factor” as related to finance. Deeply moved then by the XIXth cen- Twenty years later, the States have ac- Human health (physical, psychological tury warfare, Henry Dunant founded cumulated huge debts, dangerously and social) and social health (ecologi- the Red Cross, whose symbol surely turning to the financial market in order cal, cultural and economic) can both lead derives from the reversed Swiss flag. to finance the ever rising public deficits. to healthy financials ...as highlighted in More importantly, it symbolizes the red Meanwhile, the UN is currently trying slides shown on next page. blood shed on the battle fields. Today, to raise $16.4 billion just to cover the as a response to the call for sustainable humanitarian needs of 2015 (after $8.5 Mr. Luttenberger went on with explain- development, Henry Dunant might cre- billion in 2013 and $12.9 billion in 2014). ing the central and vital role of interme- ate another type of humanitarian orga- The Red Cross budget is also exploding. diaries and the fiduciary aspect of their

______24 TRUSTING N°7 – January/June 2015 UNOG-day / CIFA’s SPECIAL EVENTS

activity. It is sound fiduciary which leads to: - suitable investments - serviceable debts - balanced budgets - realistic expectations - healthy personal and public finance Very convincingly, Mr. Luttenberger, told the audience the future that he envisions for “fiduciary” going forward, as his last slide highlighted better than any words could do ...here on right. Then, the mike turned to me, Ms. Co- sima F. Barone (CIFA’s Executive Board Member, Board Member & Direc- The main aim is, evidently, to achieve book published in Switzerland (about tor of GSCGI-SAIFA) as I was expected, a harmonized approach between “PRI- the death of banking secrecy), not only Hanifa explained, to deliver brief clos- VATE MEANS AND PUBLIC AIMS” …I the customers were never mentioned, ing remarks about topics covered dur- just borrowed from Mr. Yves Nidegger but also it was totally ignored how the ing the various interesting and insight- the title of his speech, because it re- banks and other financial institutions ful speeches. sumes so well what it is imperative to betrayed their customers and never Ladies and Gentlemen... Being the last achieve today for a better world tomor- made good on the very services and person to address this distinguished row. “trust” they had previously promised to them. It is highly regrettable that audience, I find myself in the unpleas- We heard Mr. Christian Friis Bach speak large institutions do not put people ant role of keeping you in the room for about the UN major goals, going well first, but IFAs do. a few more minutes before we all enjoy beyond MDGs, such as the vital goal to the next session, a luncheon to which eradicate poverty by 2030 that he qual- I was stricken by the evaluation of an- CIFA is inviting us all. ified as a “historic achievement”. He in- nual financial needs for the post-2015 Today’s session focused on the UN sisted about the importance of putting SDGs to be achieved. These needs Post-2015 Development Agenda and people first. Across the financial world, amount to several trillion dollars need- Strategies, especially about how to in- however, the huge consolidation of in- ed each year! Indeed, a huge objective volve the Financial Sector as well, be it stitutions is penalizing enormously the requiring a close cooperation between in terms of partnerships or otherwise. individual customers. Even in a recent public and private economic and fi-

______TRUSTING N°7 – January/June 2015 25 CIFA’s SPECIAL EVENTS / UNOG-day

nancial forces. The need of increased are more interested in creating value anyone. As per my own experience (I regulation was also mentioned. From through longer term investments, lived and worked in Wall Street), there is our (IFAs) standpoint, however, we rather than speculating on short-term a permanent war situation in finance, are observing every day the damage sophisticated investment widely pro- be it between financial institutions and caused by increased regulation. It dis- moted by large institutions aiming in regulators and/or between individual fi- courages private enterprise. If IFAs are most part to earn ever larger commis- nancial institutions moved by constant pushed out of the financial sector, then sions and profits. competition. For instance, it was not the last bastion for sound and creative Mr. Jean-Pierre Diserens told us that surprising to me that Goldman Sachs cooperation between savers and MDGs in his view MDGs failed, but that SDGs (through Hank Paulson, then Treasury will disappear, as large institutions only must succeed through a close coopera- Secretary) would put to death Lehman care about making money and much tion between public and private forces. Brothers once the opportunity came, less about SDGs and MDGs regardless The IFAs across the globe are more in- regardless of the financial crisis which of how laudable these initiatives are. terested in investing their customers’ spread across the world and the huge Dr. Joerg Weber stressed, among the capital in positive, constructive and losses that it caused. I truly appreciated various topics he touched on, the glob- long-term projects as opposed to the Mr. Nidegger’s suggestion to found the al aspect of MDGs and SDGs as these speculative trading activity. There are International Gold Cross Committee. themes are being discussed in Geneva, approximately one million of IFAs across Is this a creative and effective way to New York, Paris and other major capi- the globe represented by CIFA. fund the SDGs? We do expect, how- tals across the globe. He described, in ever, from policymakers better regula- Mr. Pierre Christodoulidis drew our at- tion, the type which does not suffocate great detail, the flows of FDI (foreign tention to the economic inequality direct investments) in several countries private initiatives within our profession leading to social discontent and, some- and industry. and expressed optimism that these times, unmanageable unrest across flows should increase going forward. the globe, a phenomenon not limited We hope that our presentations today My concern is that FDIs’ major aim is to emerging countries, but spreading provided insightful information about a very simple equation: Risk-Reward. as wild fire throughout the developed the Financial Sector and its mecha- These flows might come in a country, world as well. He praised how impor- nisms. In order for the UN post-2015 but they could easily leave once the tant is that politicians act responsibly goals to be achieved, both the public financial objective (profit) is achieved and provide the appropriate judicial and private forces must work together regardless of other, although, noble processes for the financial system to and promote truly transformative think- promises and objectives (SDGs). work efficiently. ing and action. It is evident that many segments of the Mr. Zoltan Luttenberger explained at I’ll stop here. We at CIFA – FECIF – and world economy need to be reformed: length the “KEY” fiduciary role of IFAs, GSCGI are very grateful for your time the global financial system, along with a true bastion against the “conflict of and attention. We look forward to a the international tax and international interest” which is unfortunately deep- constructive and continued coopera- trade, to name only the most impor- ly anchored in the banking industry tion with the UN institutions. tant. Mr. Vincent J. Derudder drew our (banks creates and distribute their funds Ms Hanifa Mezoui closed then the attention on the fact that, in the EU as and other financial products). It is, there- meeting, but not without stressing that an example (not dissimilar from other fore, imperative to define and promote SDGs are about sustainability and pov- trends across the globe), global leaders a “Universal Fiduciary Duty” in order to erty and that the entire world is being lean towards large institutions while increase awareness and enhance best associated to these goals. Each of the the real value and transformative force practices within the financial sector. 17 SDG goals has so many sub-goals in lie in the individual and small business which all global industry could find a initiatives. The IFAs do put forward the Finally, I would like to spend a few words way to act for the good interest of their customers before their about Mr. Yves Nidegger’s presenta- of all. own interest. The global leaders, legis- tion. Again, Mr Nidegger surprised the lators and regulators must understand audience with creative comments and “possible” initiatives. Linking the war Cosima F. BARONE this aspect and act accordingly in order FINARC SA to allow long-term investment initia- fields of Solferino to the economic and www.finarc.ch tives to blossom. After all, consumers financial warfare should not surprise [email protected]

______26 TRUSTING N°7 – January/June 2015 UNOG-day / CIFA’s SPECIAL EVENTS

______TRUSTING N°7 – January/June 2015 27 CIFA’s SPECIAL EVENTS / UNOG-day

______28 TRUSTING N°7 – January/June 2015 UNOG-day / CIFA’s SPECIAL EVENTS

______TRUSTING N°7 – January/June 2015 29 CIFA’s SPECIAL EVENTS / UN-AOC

UNAOC’s Sixth Global Forum United Nations Alliance of Civilizations Bali, Indonesia, 29-30 August 2014

CONCEPT PAPER Indonesia is the world’s largest archipelago with over 17,000 tions (UNAOC). An initiative of the United Nations Secretary- islands. The country stretches 5,100 km along the equator be- General that is supported by 114 states and 25 international tween the Australian and Asian continents and straddles the organizations (members of the Group of Friends), UNAOC works Pacific and Indian Oceans. The home of more than 490 differ- to develop innovative models for ameliorating identity-based ent ethnic groups, speaking different languages, following dif- tensions around the world. ferent traditions and professing different religions, Indonesia Following on the success of five consecutive forums in Spain, has absorbed the influences of the world’s great civilizations. Turkey, Brazil, Qatar and Austria, the Sixth Global Forum of With a fascinating and colorful history, Indonesia is blessed the UNAOC will take place in Bali, Indonesia on 29-30 August, with a rich and dynamic culture. 2014. The Forum will bring together political leaders, repre- Indonesia’s diversity is celebrated in their national motto, sentatives of international and regional bodies, the private “Bhinneka Tunggal Ika”, which translates into English as “Unity sector, civil society, youth, the arts, and the media as well as in Diversity.” This reflects the outlook of Indonesia’s Founding donor agencies and foundations, to vigorously foster cross- Fathers that embraces the wealth of our cultural, ethnic, lin- cultural dialogue and understanding. guistic and religious diversity. We in Indonesia are convinced Bearing the theme “Unity in Diversity: Celebrating Diversity that diversity is not a liability or a threat. Indeed, it enriches for Common and Shared Values”, the Forum will highlight stra- and it empowers. It serves as the fountainhead of the social tegic and yet practical measures that generate and sustain strength. common values and a shared sense of responsibility among Indonesia’s diversity is reflected in the broader context that all stakeholders, partners and constituencies toward the real- marks the relations of the nations in Southeast Asia that make ization of the mandate and objectives of the Alliance of Civili- up the Association of South East Asian Nations (ASEAN). Not zations initiative. unlike Indonesia, the ASEAN countries are similarly diverse During the two-day Forum, two plenary panel discussions in terms of culture, religion, economic development and po- will be convened focusing on the main theme, followed by litical history. With such diversity, the region is transforming a series of break-out sessions dedicated to the four pillars of itself into the ASEAN Community, with a single vision and a the Alliance of Civilizations. Participants will take part in the common sense of identity by 2015. In a globalized world this partners’ exhibitions, award ceremonies, video screening and capacity to unite and cooperate inspite of diversity is a source various side-events, which UNAOC’s partners will have the op- of strength and dynamism. portunity to organize at the margins of the Forum. All this makes the Indonesian example particularly relevant Against the backdrop of the over-arching theme “Unity in Di- to a number of ongoing transitions taking place around the versity: Celebrating Diversity for Common and Shared Values”, world, including in Asia Pacific region .Indonesia’s recent ex- the Forum’s break-out sessions will address the following is- perience also makes it a particularly special setting for the sues: continued on following page 2014 Global Forum of the United Nations Alliance of Civiliza-

______30 TRUSTING N°7 – January/June 2015 UN-AOC / CIFA’s SPECIAL EVENTS

• Promoting harmony through inter- • Social inclusion and migration: devel- discussion on the post-2015 develop- religious and cross-cultural dialogue; opments for post-2015 agenda; ment agenda. As one of the event’s outcomes, members of the UNAOC’s • The role of women in fostering un- • Perception of migration: how to Group of Friends will adopt the Bali derstanding among cultures; change the narratives about mi- Declaration on the Alliance of Civiliza- • Fostering understanding through the grants. tions, reaffirming their commitment to power of sports, art, music and enter- Prior to the Forum, a youth event will be support the mandate of the Alliance tainment; held under the topic “the role of youth and identify concrete and implement- able measures in line with the main • Youth participation in peace-build- in promoting unity in diversity through theme of the Forum. ing; education, media and migration”. • Media conversation across lines; The Sixth Global Forum of the UNAOC, the first in the Asia Pacific, will seek to • Harnessing the positive power of so- reflect and benefit from the diverse cial media in reconciling the demand setting of the region. Furthermore, of security and the right to privacy as the Forum will set the debate within a well as the freedom of expression; wider context, including the ongoing New York and Jakarta, May 2014

* * * CLOSING REMARKS BY H. E. MR. NASSIR ABDULAZIZ AL-NASSER THE UNITED NATIONS HIGH REPRESENTATIVE FOR THE ALLIANCE OF CIVILIZATIONS BEFORE THE MINISTERIAL SEGMENT OF SIXTH UNAOC GLOBAL FORUM

Your Excellency Mr. Marty Natalagawa, and were energized by the events of sues related to building more peace- Foreign Minister of Indonesia Thursday afternoon and evening. It ful, more tolerant societies. We were Your Excellency Mr. Juan Manuel Garcia- has been a busy and exciting couple of all impressed by the high quality of the Margallo, the Foreign Minister of Spain, days! questions they asked of the Secretary- General, Foreign Minister Nakalagawa Your Excellency Mr. Ali Naci Koru Deputy and my self. Indeed, some of the ques- Minister of Foreign Affairs of Turkey, Let me recap some of the highlights. tions were really challenging! Our Focal Points met on Thursday after- Excellencies, noon. There, they agreed unanimously Then, we had the great honor to watch to the Bali Forum declaration. You, the the announcement of the new class Ladies and Gentlemen, Ministerial representatives met yester- of awardees of the BMW-Intercultural I am grateful for your thoughtful and day and we took note of the thoughtful Innovation Award. All finalists will be helpful interventions during our minis- comments made by many of you. We awarded support to help their projects. th terial segment of the 6 Global Forum. also were gratified to hear that new I know, we were all touched by the I am also grateful for your stamina and pledges of support to our Trust Fund emotional power of the presentations your tolerance. Yesterday was indeed a from Qatar and Indonesia. We also of the projects that received recogni- th long day and I value your input. received our first offer to host the 7 tion. It was a magical evening. Global Forum in 2016 from Azerbaijan. Aside from our Ministerial segment, Yesterday, we moved into the core of yesterday provided us with some ter- On Thursday, we watched as the 75 our forum program, the plenary ses- rific insights and real opportunities to youth selected from Indonesia and sions, the breakout sessions and the learn. And, of course, we all enjoyed around the world tackled difficult is-

______TRUSTING N°7 – January/June 2015 31 CIFA’s SPECIAL EVENTS / UN-AOC

side events. The conversations were corporations. Inter-connectivity de- cultural backgrounds. rich and diverse in their substance. I mands global concepts of citizenship. We have learned about “Preserving was pleased to get the chance to visit Our breakout sessions gave us the lessons of coexistence from Different many of them myself. chance to explore more specific issues Cultures through History” in a session and explore them in greater detail. sponsored by the Research Centre for Plenary 1 Islamic History, Art and Culture. “Learn- ing about the Other” was a critical tool In Plenary 1, we learned about the wide On Promoting harmony to ameliorate identity-based tensions application of the term “Unity in Diver- through inter-religious and all over the world. Going back to histo- sity”. Five noteworthy speakers raised cross-cultural education: ry and everyone’s own tradition is a pre- the varied ways in which the term can The panelists coincided in pointing out cious and rich fountainhead enlighten- be applied, ranging from the need to that to respect and learn about other ing our present and the way the entire consider migration as a fundamental religions is a way to improve and pu- human family can coexist together. human right, to the diversity of food rify one’s own religion. But, mutual The Universal Peace Federation has and cultures as reflective of broader respect, one of the panelist insisted, sponsored a side event, to teach us how diversity of human civilizations, and must be transformative and engaging to build Trust through Interreligious Di- the key role that food security plays in as well, not limited to a simple accep- alogue. Respectful religious leaders to- building peace. We learned about the tance of tolerance, but developing into gether taught us how to dialogue, and need to examine our differences and positive action. To move in this direc- exchange views and insights on how our differing cultures, if we are to build tion, the panel recommended includ- to build trust, and cooperate with each a proper foundation for conflict reso- ing inter-religious education in primary other’s and among religions. lution. And, we learned about global and secondary school curricula as a citizenship, both at the level of the indi- way to encourage better understand- A side event sponsored by the Indo- vidual and at the level of multinational ing among individuals from different nesia Global Compact Network pro-

______32 TRUSTING N°7 – January/June 2015 UN-AOC / CIFA’s SPECIAL EVENTS

vided insight on Promoting Harmony Youth Participation in Peace- move forward communities after a di- through Business. It emphasized the Building saster. Bottom up, instead of top down, importance of Business for Peace initiatives have significantly more Talking about peacebuilding, experts (B4P) as a leadership platform aims to chances to be successful. It was point- from four different countries shared expand and deepen private sector ac- ed out that, while globalization tends their thoughts. The session started with tions, in support of inter-cultural and to produce assimilation of communi- showing the “Guiding Principles on inter-religious peace and harmony in ties, the same forces are also a dynamic Young People’s Participation in Peace the workplace, marketplace and com- motor that energizes the development Building” which will be used to advance munities.” and conservation of local cultures. And, the role of youth in peacebuilding. we learned about the new concept of Participants spoke about issues, such as “Venture philanthropy” that facilitates Media conversations across lines the importance of economic issues for the empowerment of communities, A debate about the media’s increasing young people. By having activities to providing in the process opportunities power through social media and con- help their communities, young people for sustainable development. Culture stant access to information, panelists can avoid being influenced by intoler- was recognized as a soft power tool to stressed that people need to under- ance, extremism and xenophobia. Par- advance the sustainable development stand and appreciate the enormous ticipants described the damage that agenda. power that the media possesses, and can be done through bad stereotypes We have learned about Mobilizing Di- the damage that it can cause, realizing about young people, migrants, health verse Communities on Climate Change that published material, whatever form status, and sexuality. Participants iden- and Justice in the session sponsored it may be in, may result in collateral tified potential solutions, such as the by the International Ecological Safety damage. The media, facing a variety development of theatre and art shows Collaborative Organization. This side of internal and external threats, must to encourage the youth to take part in event was of great significance for im- improve its ability to operate in an un- peace building. Social media was also proving the dialogue on ecological civi- biased and transparent way. identified as an effective way to attract lization, and for realizing the Post-2015 youth. Another alternative was the use Sustainable Development Agenda, and of contemporary methods of commu- an opportunity to clarify the meaning Social Inclusion: Developments nications to encourage youth to par- of Ecological Civilization, which is “reg- for the Post-2015 Agenda ticipate in peacebuilding. The discussion explored the current sit- ulating human behavior and realizing Alumni of the fellowship program, uation surrounding migrants, challeng- the harmonious coexistence between one of the flagship projects of UNAOC es and potential for positive change in mankind and nature”. sponsored by the German Government, the future. It was asserted that, as mi- The Food and Agriculture Organization participated in the different break-out gration is inevitable, it is necessary that of the United Nations has sponsored a sessions. The 4 Alumni expressed their we have the skills available to responsi- side event and showed us what is in- commitment to working on fostering bly manage social diversity. volved in Promoting Cross-Cultural Un- understanding and dialogue and to derstanding through Food Security. This should translate into the right to continue to dedicate their personal and access all public services, and live with- professional lives to making an impact UNAOC welcomes the strengthening of in an environment cultural and reli- on local communities and institutions the partnership with FAO, whose adhe- gious tolerance that would leave them with a view to fostering gender equal- sion to the UNAOC’s Group of Friends free to exercise their freedom in explor- ity, social inclusion, economic develop- during the forthcoming months is an ing their integration while celebrating ment and dialogue. acknowledgement that food security their diverse identity. One method is and peace have a binding and mutual to encourage community-based pro- connection. grams that enhance social inclusion in The role of culture in the for- We have learned how to “Increase host societies, as well as instill in host mulation of new sustainable Awareness on Finance and Cultural Di- governments that it is in their national development versity” in a session sponsored by the interest to manage migrant integration Cultural heritage and pride was rec- Convention of Independent Financial well, within their country. ognized as a main driver to revive and Advisors (CIFA). We have realized that

______TRUSTING N°7 – January/June 2015 33 CIFA’s SPECIAL EVENTS / UN-AOC

economic development is essential for Fostering understanding grams supported by UNAOC. The con- peace, and can only be achieved when through the power of sports, nection to youth is essential. Changes the conditions for wealth creation exist art, music and entertainment in our ecological health impact the fu- in a country when economic progress ture and, we know, the future belongs Four main lessons were considered the can be shared with the community and to the youth. Handled properly, a well- participants – crucial elements to foster WHEN CULTURAL DIVERSITY IS RE- managed ecology can create economic understanding through the power of SPECTED. growth. sports, art, music and entertainment: We have benefit from the expertise and • Emphasizing the concept of reaching uplifting stories of people from all over out to challenge ourselves and going Ladies and Gentlemen, the world. We have heard voices of into places where you have not been wisdom from our great faith traditions before. We have had a wonderful time here in calling us to a world of peace, justice Bali. All of you, government represen- • Being ready to look at images and stories and environmental sustainability. New tatives and civil society representatives that surprise and challenge the existing alike, have done your part to make alliances have been formed and new beliefs. insight has been gained. our conversations fruitful and ensure • Choosing leaders that touch hearts and that the 6th Global Forum will long be I am confident that they will continue spirit. remembered not only for beauty of its to be instrumental in advancing the • Cultivating a sense of human empathy. setting but the quality of its debates. implementation of the Sustainable Development Goals (SDGs) through Before closing, let me one more time innovative partnerships under the Perception of Migration: How thank our hosts, Republic of Indone- post-2015 vision. to Change the Narratives sia. None of this would have happened about Migrants without the dedication of H. E. Minister The principles of collective responsibil- Marty Natalegawa, Amb. Esti Andayani ity, collective accountability, collective During this session, panelists discussed and the rest of Indonesian team. They trust, collective hope, collective sharing how word choice in articles and per- have lifted heaven and earth to make and collective inspiration toward inter- spective in photographs, for example, this a most wonderful experience. cultural and interreligious dialogue to give a specific perception to the read- achieve “Unity in Diversity”, have guid- ers or viewers. Unfortunately, this per- I would also like to thank the interpret- ed us in this forum, as members of the ception is often negative. In an effort ers, the conference officers and the human family, regardless of our race, to provide a solution to the often nega- security personnel for their tireless ef- religion, ethnicity, cultural or national- tive perceptions created by common forts. ity we stand on common values. From depictions of migrants, UNAOC and I also would like to thank my team, that place, let us work together for a Panos Institute Europe has launched a especially the task force for their dili- world of greater peace. Media-Friendly Glossary on Migration. gence, resilience and hard work. You all It stresses the importance of using the did a great job. correct terminology when journalists Harnessing the Positive Power are reporting on migration. May we all return home to continue the of Social Media important work of the Alliance. The benefit of social media in enhanc- I thank you. ing democracy is massive, but controls Yesterday’s side events included “Eco- are needed to prevent abuse that could logical Civilization: Time Calling for even lead to aiding terrorists. The use Common Values” of media “tribes” such as “facebook and This side event focused on the inter- twitter” in several countries is diverse. connections between ecological issues It gives young people a voice and they and economic growth, politics and sus- don’t have to put their identity, which tainable development. I attended that can make them feel secure. But, that event and reminded the participants security can itself be abused, and must that ecological issues, while important be studied further. on their own, also impacted the pro- H. E. MR. NASSIR ABDULAZIZ AL-NASSER

______34 TRUSTING N°7 – January/June 2015 UN-AOC / CIFA’s SPECIAL EVENTS

CIFA’s Concept Note Remarks by Jean-Pierre Diserens, Secretary-General

Panelists: — Steve Young, Executive Director, Caux Round Table — Salim Chanderly, CIFA Advisor , ASIA — Mahroo Moshari, Director of Manhantan Multicultural Counseling — Francois Loriot, CIFA, CSR-MDG-SDG & Human Rights Advisor — Pamela Bernabei, President IOA — Janka Palkova, CIFA Executive Committee

The financial sector’s contribu- sion of November 2013 and at the April as well as the Global Compact Principles, tion to sustainable develop- 2014 Joint GA-ECOSOC session on the and the 2001 MDGs. However, CIFA is ment in a context of cultural Post-2015 UN Development Agenda, concerned that many of these univer- diversity CIFA has actively participated to the up- sal statements have not benefited from date of MDGs, to the design of the new the private sector and from CSO timely SDGs and to the promotion of more ac- inputs, in order to truly translate and At the ECOSOC, CIFA is the sole interna- tive partnerships between the UN, the represent the cultural diversity of the tional entity of financial advisors with private sector, CSO and NGOs. 21st century. consultative status dedicated to the promotion of the UN Agenda, Goals CIFA actively supports the General As- Likewise, recent discussions at the Unit- and Objectives. At the UN-FOSS ses- sembly’s 2000 Millennium Declaration, ed Nations and Bretton Woods entities

______TRUSTING N°7 – January/June 2015 35 CIFA’s SPECIAL EVENTS / UN-AOC

on good governance, human rights, ensure “Peace, economic stability, fair notion of “responsible business” corruption, bribery, accountability, in- international business practices and - corruption, bakchich, takrim, and terest rates (ribâ prohibition of usury), sustainable development” for all. The other business gifts illicit flows and transfers of assets and CIFA Panel will address the cultural fiscal heavens, all indicate the need to differentiations of some business and - ribâ and abusive interest rates prac- involve more closely the private sector financial keywords which represent tices and CSOs in the design, discussions and major differences of human civiliza- - defense of property rights and spolia- promulgation of efficient guidance and tions, religions and of the world’s major tory taxation practices decision-making (ECOSOC res: 2006/24 legal and justice systems. A forthright and doc 6607/2014; DEV/2605 IPU/UN). and open dialogue on these conflict- - free flow of legitimate assets Many of the following financial con- ing concepts is urgent to avoid cultural cepts call, in Bali, for a cultural diver- conflicts, misunderstandings and dis- sity approach, discussion and mutual putes: understanding by Nations, in order to - good governance and accountability: Jean-Pierre Diserens

______36 TRUSTING N°7 – January/June 2015 UN-AOC / CIFA’s SPECIAL EVENTS

______TRUSTING N°7 – January/June 2015 37 UP IN THE NEWS / Short Notes

Individual Asset Managers Don’t UK watchdog cracks down on asset Making Brokers Toe the Mark Need Heightened Regulation, managers If you are in the market for financial advice, Ex-Treasury Official Says The UK’s £5tn asset management industry good luck figuring out which financial Former U.S. Treasury official Mary Miller is not doing enough to guard against po- advisers are legally obligated to act in your said she doesn’t believe financial-system tential insider trading and market abuse, best interest... risks in the asset management industry the UK’s financial watchdog has found... There is a big difference between glorified can be addressed simply by subjecting The Financial Conduct Authority has found salesman and true investment advisers, individual asset managers to heightened that only a small number of companies it and yet the onus is on consumers to sort it regulation... surveyed as part of a review had “compre- all out... Nellie Liang, director of the Fed’s Office of hensive” controls in place against... According to the financial services industry, Financial Stability, outlined areas where Financial Times, Feb. 18, 2015 a rule to protect investors would actually the Fed believes potential risks need more harm — yes, harm — the average person investigation, such as in the growing sec- in need of retirement advice, particularly tor of open-end, long-term mutual funds the smaller investors... and exchange-traded funds... NYTimes, Feb 13, 2015 WSJ, Jan. 9, 2015

Singapore decides Wall Street Regulator against swaps trading NEWS Plans to Scrutinize switch Electronic Bond Trading Singapore has decided against Finra said it would start forcing more swaps trading on NEWS conducting examinations of to regulated electronic trading firms that offer electronic bond platforms... trading, as well as “books and NEWS records, supervision and order The decision puts the Asian city execution practices”... state on a different path to the US, Japan and Europe — the NEWS NYTimes, Jan.. 6, 2015 three biggest swaps markets — to overseeing the over-the- Investors Attack Europe’s counter derivatives trading... NEWS Alternative Funds Regime A sudden shift to electronic Investors have criticized the trading would impose extra costs on a still Surge in Subprime Loans Linked to European Union’s regulation of the fund relatively small market long used to deal- management industry in a survey by the ing on the phone... Cars Draws Regulatory Scrutiny trade body the Institutional Limited Part- It is a tempting offer: Convert that beaten- Financial Times, Feb. 11, 2015 ners Association... up car in the driveway into hard cash with More than two thirds (69%) of European a simple loan... investors said that their private equity Ucits funds now speak Mandarin But car title loans, which allow owners to programs had been put at a competitive The Ucits IV directive, the latest iteration borrow money against their cars, are hav- disadvantage since the introduction of the of the European retail fund regulation, ing devastating financial consequences for Alternative Investment Fund Managers appears in Mandarin on the commission a growing number of Americans... Directive... website... Across the country, this business is boom- “The risk of missing out on a good quality This is an acknowledgment of the success ing. As the loans proliferate, regulators are investment opportunity has increased a of Ucits around the world... beginning to crack down on them... lot,” said one respondent to the survey... Financial Times, Feb. 15, 2015 NYTimes, Jan. 30, 2015 WSJ, Feb. 9, 2015

______38 TRUSTING N°7 – January/June 2015 Short Notes / UP IN THE NEWS

With Negative Rates, Europe Is Sweden pledges to investigate Adding Good Deeds to the Invest- Entering a No-Default World closet trackers ment Equation In a world of negative interest rates, it cer- The Swedish government is to become Enter a twist on social impact bonds. Typi- tainly pays to be a borrower, Shakespeare’s the first in Europe to formally investigate cally, social impact bonds are contracts, concerns notwithstanding. closet-tracking funds that charge high fees not bonds as investors think of them. If the But such a world is a strange place, for active management... group receiving the proceeds can improve especially for a restructuring lawyer. Up The Danish regulator, Finanstilsynet, a certain social condition, the investors are is down, and lenders might benefit from launched an investigation into so-called paid back with some interest; if it fails, the defaults. “benchmark-hugging” funds last Septem- investors lose. European sovereign nations have issued ber and found that...... an example of increased investor interest in social impact projects, a niche that has debt with negative returns... Financial Times, Feb. 15, 2015 long appealed to two types of investors: The New York Times, March 4, 2015 those who want to avoid companies that clash with their beliefs, and those with a FINRA gets tough in ‘high-risk desire to put a small portion of their wealth into an investment that could do some broker’ crackdown good, whatever the return. The US Financial Industry Regula- One type of social impact invest- tory Authority banned the ment is green bonds, which highest number of indi- focus on projects like wind viduals from the securities power, clean water and industry in five years last NEWS sustainable agriculture. year... It is a latest example of growing regulatory There is also a range of intolerance of financial investing strategies known malpractice... NEWS as environmental, social and governance investing, Finra, an independent regu- or E.S.G. lator charged with overseeing the securities industry to protect NEWS The NY Times, March 6, 2015 US investors, barred 481 individuals in 2014, up from 429 in 2013 and 294 in 2012... NEWSHigh-frequency trading is the new invisible hand Financial Times, Feb. 8, 2015 What’s the difference between you and Boards without womenNEWS breed a very powerful computer? This is the SEC Plans to Fix Flaw in Electronic scandal question posed by artificial intelligence Distribution System Public companies with more women on research... The Securities and Exchange Commission, their boards are less likely to be hit by scan- Roughly half of equity trades in the US and seeking to level the playing field for all dals such as bribery, fraud or shareholder UK financial markets are now carried out investors, plans to fix a flaw in how it elec- battles, according to research from index by these ultra-fast thinking machines... tronically distributes corporate regulatory provider MSCI, which looked at more than There is evidence though that the trading filings that has allowed rapid-fire traders 6,500 company boards globally. is characterised by many ‘flash crashes’, like to get a first look at potentially market- The research found that boards with that of May 2010... moving news... gender diversity above and beyond regula- ...high-frequency trading is the culmina- The issue was first raised by a pair of aca- tory mandates or market norms had fewer tion of the ‘performativity’ some social demic studies published this year... instances of governance-related scandals. scientists believe characterises finance... WSJ, Dec. 26, 2014 Financial Times, March 8, 2015 Financial Times, Feb. 17, 2015

______TRUSTING N°7 – January/June 2015 39 UP IN THE NEWS / Regulatory and Legal Evolution

The IFA message to European Regulators

FECIF (Fédération Européenne des Con- the financial services industry. During industry has evolved since 2008 to the seils et Intermédaires Financiers) is the the 15 years of its existence, FECIF has present day. In terms of its size, the main organization representing IFAs regularly met with EU-MEPs to discuss industry encompassed approximately and Intermediaries in Banking, Life In- all major issues. 700,000 companies and 500,000 indi- surance and Financial Affairs. FECIF viduals, as well as an estimated 2 mil- On December 3rd, 2014, FECIF gathered represents a large number of profes- lion back-office employees, incorpo- in Brussels for a one-day conference ad- sionals across Europe. Its members rating the administrative segment of dressing the challenges ahead for Eu- (trade associations, financial companies the European financial services indus- ropean IFA (please see the programme and individuals) are involved in the ma- try. The UK, Scandinavia and Benelux below). In their opening address, both jor European financial markets. The DAVID CHARLET (FECIF Chairman clearly led the “distribution through number of FECIF members has been and Head of ANACOFI in France) and intermediaries” sector across Europe, as growing year on year, therefore con- JOHANNES MUSCHIK (FECIF Deputy opposed to Portugal and Greece where firming FECIF’s core role of defending Chairman and Head of AFPA in Austria) the industry is much less developed. In the interests of the IFA sector within focused on how the Financial Services 2013, there were 30 trade associations

______40 TRUSTING N°7 – January/June 2015 Regulatory and Legal Evolution / UP IN THE NEWS

across Europe, spread across 20 coun- termediaries and their clients. Hence, would accept to be charged a fee for tries. However, under the weight of how is the industry going to ensure financial advice. Therefore, heavier increasing regulation, the industry has that customers’ savings will be safely regulation and a ban on commissions/ contracted quite substantially in many invested and well looked after under inducements are definitely unwelcome formerly important markets for inter- these circumstances? If legislators not only for the damage they would mediaries. DAVID CHARLET disclosed and regulators continue to lean on big cause to the financial services industry the preliminary results of a major new banks and other large financial institu- as a whole, but also to the final inves- pan-European survey being conducted tions, they must be held accountable tors’ wellbeing as well. As new trends by FECIF. Con- for having let the “too big to fail” sys- develop at the global level, IFAs will sidering that temic risk expand without preserving need to embrace change and adjust G e r m a n y , investors’ interest. their business model. France and the During the first panel, moderated by DAVID COWAN (Coordinator, Con- UK combined PAUL STANFIELD (FEIFA/ Secretary sumer Protection and Financial Innova- have more than General of FECIF/UK) and consisting of tion team - EIOPA) focused his presenta- 400 000 inter- VANIA FRANCESCHELLI (ANASF/ tion on consumer protection regarding mediaries, the Italy), STÉPHANE FANTUZ (CNCIF/ insurance distribution and EIOPA’s role. survey could France), MARTIN KLEIN (VOTUM/Ger- For the time being, the industry is be- infer that in many), and ERIC TAJCHMAN (Toc- ing mainly supervised at the national 2014 the over- queville Finance SA), there was a focus level. EIOPA must promote greater all number of on new regulation and the principle of transparency, simplicity and fairness IFAs increased “independency” as it applies to financial for consumer products/services, but its as compared to 2008. Nevetheless, a intermediaries was raised. Since MiFID role might need to evolve towards: (a) more realistic assumption would be to II is about ensuring investor protection, issuing warnings where a product pos- consider that the industry might have commissions or inducements from es a serious threat, and (b) temporarily contracted by approximately one third third parties are called into question. banning certain types of products. A of its 2008 reported size especially in Banning commissions/inducements further push to prevent regulatory ar- two or three major markets (the UK and (as in the UK and the Netherlands) bitrage and promote equal conditions the Netherlands). Another insightful as- would, undoubtedly, threaten the cur- of competition was mentioned by Mr. pect emerged from the survey: two pri- rent IFAs business model (focused on Cowan. mary categories of professionals (bro- the distribution of financial products). kers/advisors and agents) concentrated Supervision is facing all sorts of ob- If no longer viable, and should ESMA in specific countries. FECIF is presently stacles, due to the wide diversity of finalizing the research for this survey, continue to push forward with this is- intermediaries (not enough consolida- the results of which are expected to sue, then financial intermediaries will tion has occurred yet across the industry) bring a clear vision of the current in- need to build a new business model. and no direct control possible over IFAs. dustry situation. Fees charged to the final investor will Forthcoming new legislation “IMD 1.5”, surge in a new business model frame- aimed at tackling conflicts of interest JOHANNES MUSCHIK stressed that, work. As a consequence, fewer cus- inherent to “Insurance-Based Invest- when the European Financial Ser- tomers will be able to afford the higher ment Products” (IBIPs), will go through vices Action Plan was first launched in cost of financial advice at a time when a two-phased consultation process and May 1999, its main goal was to “make they need it most, particularly consid- might be delivered for technical advice regulation easier for private investors”. ering that central banks are currently to COM in February 2015. Regarding Fifteen years later, the required paper- keeping the interest rate pedal pressed IMD2 (or IDD) expected to be finalized work has multiplied significantly, mak- to the floor. Several surveys run by dif- by summer 2015, COM called in July ing financial intermediaries, and also ferent bodies, either regionally or glob- 2012 for a “mandatory disclosure of their customers as well, struggle under ally, have revealed that the number of the full amount of remuneration after the weight of regulation. Inevitably, financial intermediaries has diminished a 5-year transitional period”, while Eu- the supply of financial instruments has substantially after the introduction of ropean Parliament (EP) amendments shrunk in countries where heavy regu- heavier regulation. Surveys also un- of February 2014 also required the dis- lation is the “rule”, affecting financial in- covered that only “wealthy” investors closure of the source of remuneration

______TRUSTING N°7 – January/June 2015 41 UP IN THE NEWS / Regulatory and Legal Evolution

(commissions/inducements). Equally in- ble on Swiss territory. Incidentally, Mr. An insightful presentation on the teresting is that, according to the EP, ty- Merz resigned in October 2010. Then, impact of RDR on the UK market by ing practices are not explicitly banned Swiss bankers designed the “RUBIK” GARRY HEATH (Consultant - Special and multi-risk policies would be al- system, negotiated with the UK, Aus- Risk Bureau Insurance - Editor of “The lowed. Overall, EIOPA views “supervis- tria and Germany, in order to maintain Heath Report” which explains the dan- able ethical conduct” as important as what was still left of the “banking se- gers of the Retail Distribution Review to continuous training of intermediaries. crecy” (preserving customers’ identity) UK consumers) attracted the attnetion Mr. Cowan stressed as well the need for and involving the bulk transfer of taxes of the audience. In short, RDR banned a “level playing field” between interme- due to foreign countries and collected commissions and allowed no grand- diaries and the staff of insurers within a by Swiss banks. Eventually the system fathering for experienced advisers. harmonized approach to avoid market failed, especially when international Essentially, the regulator presumes to fragmentation. Currently, EIOPA is fo- pressure to move faster took hold,due decide how a consumer pays for advice cusing on strengthening process con- to the US-FATCA legislation and the and service. The impact on the industry trols by manufacturers before product wider automatic exchange of informa- has been quite dramatic as highlighted launch with the “Guidelines on Product tion system. in the slides. Garry Heath went on to Oversight & Governance by Insurers”, a How then to ensure protection of indi- say that, in the four years since RDR became a reality, more than 11,000 UK public consultation that runs until 23rd vidual rights at the national level when advisers have exited the industry and, January 2015. The next step is expect- the exchange of information becomes ed to focus on distributors. as a result, 11 million consumers have automatic? When information was re- lost their advisers. Moreover, another 8 The automatic exchange of informa- leased only based on specific and moti- million consumers are in danger of los- tion between national fiscal authorities vated demands, there was room for de- ing their adviser. RDR definitely attacks across the globe was approached by fense. To the contrary, whenever there the least financially astute consumer by YVES NIDEGGER (National Council is “automatic” transfer of information, denying them commission as method Member, Swiss the individual involved cannot even be of payment! Equally worrisome is the Parliament), informed, according to the law as cur- increasing interference of the regula- who candidly rently drafted. As a consequence, the tor in the client/adviser relationship. admitted that, individual would have no way of de- Increased regulation is not only costly compared to fending his or her own rights. to the “voiceless consumers in whose five years ago, The Swiss Minister of Finance, Ms. Eve- name the regulator acts, but for whom the Swiss per- line Widmer-Schlumpf, has put a lot no protection is offered” affirmed Garry spective has of pressure on Parliament members Heath. morphed quite to have the new law implemented d r a m a t i c a l l y. on time to start collecting data from While pointing to the lack of “level play- In 2009 (March January 2017 onward for delivery to ing field” which is particularly worri- 13th), Mr. Hans- relevant countries beginning in Janu- some, Garry Heath looked at increased Rudolf Merz (then ary 2018. Apparently, the multilateral regulation as a “disguised” nationaliza- President of the Swiss Confederation and approach is favored, instead of bilateral tion of financial services by left wing Head of the Federal Department of Fi- agreements, since it could speed up the politicians and ...managed by bankers nance), bowing to international (G-20) whole legislative process and ensure a for the benefit of the big battalions pressure to loosen banking secrecy timely implementation of the new law. eternally attacking the small players”. rules to help other nations fight tax eva- More generally, Yves Nidegger pointed No better lessons come from Brussels sion, pledged that Switzerland would to the major changes emerging within nowadays. Large scale regulation is “accept the standards of the Organi- our countries and especially to the fact inevitable and ...IFAs will continue to zation for Economic Cooperation and that instead of encouraging wealth be in a perpetual war with the bigger Development (OECD) on administra- creation, the administrations (civil ser- players (banks and insurance compa- tive assistance on tax matters”. By do- vants) in power are focusing on tax col- nies) whether they want it or not. He ing so, there was no longer a difference lection. In conclusion, he said ...If tax recommended that IFA representations between tax evasion and tax fraud and collectors make up the political cul- play to their strengths by in particular “de-facto” Swiss law became inapplica- ture, one has to worry! including clients and consumers. Apa-

______42 TRUSTING N°7 – January/June 2015 Regulatory and Legal Evolution / UP IN THE NEWS

The quality of the information given to the consumer is not improving, it is regressing. Recently it was decided by Parliament that all data on past performance compared to benchmarks no longer needs to be part of the disclosure regime (PRIPs/KIIDs). Hence, investors will no longer be informed of how well or how badly an investment product has performed. The priority for the consumer is to have unbiased and cost efficient advice which doesn’t mean that the banks are offering more cost efficient products with better returns. A perfect example of this is the Nr 1 capital guaranteed life insurance product in France (Fonds en EUR) which in 2013 had a nominal rate of return of 2.6% via bank agents’ distribution and an average of 3.3% on the IFA network distribution side. Take away the Finan- cial Intermediary channel and the consumer will have no other choice than to live with the lower end of the return scale, the 2.6%. Guillaume Prache concluded that commissions are by nature a risk for conflict of interest, which however doesn’t imply we should be banning all commissions and kill the multi-product advisor who can give access to better performing products bearing in mind that it’s not always the biggest fund that gives thy is the worst attitude for advisers consumer and financial intermediary the highest returns. Taking reality into and consumers ...he added, in clearly organizations is to find a way to rebuild account, the banks will not engage in stressing that a financial services mar- trust in retail investments. Too often open architecture, they will be promot- ket dominated by the big players is def- individual investors are provided with ing their own products in their own in- initely not in the consumers’ interest. underperforming investments. The terest. Let’s keep the dialogue between GUILLAUME PRACHE, representing real returns, after inflation and in terms consumer and financial advisor open the European Consumers Federation of purchasing power, for long-term and let’s hope ESMA will think twice be- for Financial Services ‘Better Finance savings and pensions, are in negative fore putting in place inefficient regula- for All’ wanted to provide an insight of territory. Returns on bank accounts tions. what the situation is like on the other are worse. Both consumers and insur- Finally, the topic for the round table side of the river, in “Consumer Land”. ance companies in the financial indus- discussion, moderated by VINCENT The purpose of this being to establish try are even often forced into investing J. DERUDDER (Founder, Honorary a better understanding of the issues in products that are inevitably losing Chairman of FECIF, and President of the they’re coping with and foster dialogue money such as government bonds Consultative Committee) was to define with the Financial Intermediaries Fed- which, using the correct terminology, is the value of the Financial Advisor and eration. A common challenge for the called financial repression. Financial Planner to individual consum-

______TRUSTING N°7 – January/June 2015 43 UP IN THE NEWS / Regulatory and Legal Evolution

ers and society. The panel consisting day, with investment advice being rec- sumers. As the EU is taking on a big- of ARCADI ORRIT (AIF/Spain), MARC ognized and IFAs officially registered, ger role, increasing its footprint in the VAEL (BZB/Belgium), JIRI SINDELAR the consumer has an enhanced protec- market, it was important to link forces (USF/Czech Rep), JEAN-PIERRE DIS- tion and the quality of the advisor has and join FECIF. ERENS (Secretary General of CIFA Swit- improved. Profiling the IFA profession Jean-Pierre DISERENS surprisingly (or zerland, an NGO with special consulta- versus the banks, the IFA has a much less surprising for those who know Jean- tive status at the UN-ECOSOC in New more dynamic, independent and per- Pierre) did not want to talk about IFAs. York) and PATRICK LE JUSTE (CEO of sonalized approach. As far as clients He wanted to give the audience a feel of MIM3, Money in Motion, an asset man- are concerned, who cannot afford Fi- where the world today is going wrong agement company in Luxembourg) was nancial Advice, the IFA can delegate and where we could be going from asked to lend their opinions and sug- some services to the Association at re- here. People who need to structure gestions on the subject. In his opening duced cost. their retirement have to be concerned words, Vincent Derudder reminded From the point of view of an asset man- about how the world is looking at the us of what FECIF ager and financial engineering plat- future, in the light of the Bretton Woods was all about, form in Luxembourg, Patrick Le Juste institution that when launched considers the EU market to offer advan- was set up 15 years ago, tages. The main reason for moving the after WWII, and how its MIM3 headquarters from Geneva to giving some objectives have Luxembourg was to have better access s i g n i f i c a n t evolved. At the to the EU market by means of the Eu- a d v a n t a g e s start, the goal ropean passport. He considers IFAs to to those who, of the EU com- be highly important in developing the in first place, mission was to asset management business and he wanted WWII; enlarge the sin- understands that the new regulations a d v a n t a g e s gle market, to have limited the positive effect on the that today organize a harmonization amongst the industry. Unfortunately, whether we are no longer EU members and to facilitate cross bor- like it or not, we’ll have to adjust the justified. The der business between member states. sails and probably come up with a new monetary aspects, represented by cur- Then, suddenly, a tsunami of regula- model. Looking at the reaction of the rencies which are merely a piece of tions came upon us and FECIF was asset management sector in the Neth- paper with ink on it but endorsing con- forced into the role of advocating the erlands following RDR-type rules, the siderable political power, grant outra- interests of IFAs. The UK RDR was con- management fees have been increased geous powers to those who are plainly sidered to be the model for wider Euro- by “times two”, and sometimes “times broke. A rebalance will be needed and pean regulation, without really weigh- three”. Patrick Le Juste hopes that that rebalance will be made by taking ing up any serious consequences this regulators can somehow come to their the money where the money is need- could bring about. Looking at other senses and review the situation. ed. Making everyone transparent is sectors, there is Not One that dictates the road to expropriation and hence- Considering that the Czech Republic how people should be remunerated, forth rebalance. In other words, a new is a rather young market, according to except in the financial industry - and Bretton Woods agreement and a new Jiri SINDELAR, the IFA profession is still the worst fact is that for the financial system in which the client will be the looking promising. Two out of three sector, the remuneration for people in victim. Seeing this happen in its back new insurance contracts in the Czech the financial industry is being decided yard, the European population how- Republic come through IFAs. The fact by a couple of guys in Brussels, Frank- ever is lame and doesn’t raise its voice. that there is commission cap protects furt and London. It didn’t at the time and it doesn’t now. the clients and is no hurdle to IFA busi- What Jean-Pierre DISERENS considers Looking at the situation in Spain, in nesses. Even though a young market, to be the most important thing is to Arcadi Orrit’s view, the regulation has the Czech Republic has adapted rapidly protect clients and therefore, this time been beneficial. Some 7 to 8 years ago due to the fact that the supply chain round, we need to speak up. anyone could be an IFA in Spain which has changed. Most IFAs are switching was a rather dangerous situation. To- to a higher added value for the con- Mark VAEL, representing BZB (a trade

______44 TRUSTING N°7 – January/June 2015 Regulatory and Legal Evolution / UP IN THE NEWS

association in Belgium, having 1600 tion at hand and we’ll need to wait and of a social role considering smaller cli- members representing 3000 IFAs in the see where the new regulations will re- ents and their lack of access to financial Flemish part of the country), did want to ally lead us. He hopes that an asso- advice. Banning commissions will lead emphasize the ongoing need for IFAs ciation like FECIF can prevent or limit a to the same results as the Heath Report. and why they bring value to the indi- “wild-growing” of regulations but what- With far too much disclosure imposed, vidual consumer. A survey in Belgium ever the results are, we’ll need to cope regulators forget what the real impor- resulted in 69% of consumers answer- and live with the outcome, whether we tance is: they see where the big money ing positively to the question of wheth- want it or not. The only solution ac- is however they don’t take into consider advisers add value with regars to cording to Patrick Le Juste is to use a eration how that money was earned. insurances services. The added value model that might solve overregulated All Panel Members remain, however, resulted mainly from the personal rela- scenarios. Jiri SINDELAR stated that no optimistic on the future even though tionship with the IFA and the good and one can object to fair disclosure using we are on the cross-roads of change. clear advice clients receive, not only in appropriate measures on commissions As Marc Vael put it, the biggest chal- the process of setting up the relation- and remunerations. As currently there lenge today is not the changes, rather ship but also for the after-sales ser- is no appropriate capital available in the speed of change. That, along with vices. Human contact is a justification the Czech Republic, tax transparency the digital evolution, is what we need for turning to IFAs as opposed to insti- will in no way solve tax issues. Hence, to deal with. tutions, where the justification merely the number of customers this would in- To conclude, David CHARLET relies in the fascination with the name volve in the Czech Republic would be minded the audience that the legisla- along with the feeling of a certain se- rather small. To Jean-Pierre DISERENS, tors dictating rules for our industry are curity. Marc Vael could only conclude transparency is going to be a choice. A politicians and civil servants, whose from this that there still is a bright fu- choice for the clients as to where they role is to represent citizens and their in- ture for the IFA. are taking their wealth considering that terests (develop rather than destroy the Vincent DERUDDER’s closing question there are still 141 countries in the world profession). While we still have many to the panel referred to how they felt that continue to value sovereign rights. things to worry about, it is not yet too about transparency and disclosure of That, however, leaves behind the mid- late to correct matters. David Charlet is remuneration as well as disclosure of dle-class, the people who do not have proud to represent our industry, which the client’s personal information, which much of a choice and who are going was able to adapt to numerous New will end up with the tax man. Arcadi to be hit hardest by means of expro- Directives and texts, even totally trans- Orrit feels that clients should not have a priation or, in other words, who will be form its business model in less than 10 problem with this provided that the IFA walking the streets naked. The logic in years for the benefit of our clients. all this is missing. Mark Vael’s opinion makes the client aware that disclosure On that optimistic note, we wish you was entirely in line with Mr. Diserens’ is imposed on them by the Supervisor. all a very optimistic 2015. May we all opinion and further pointed out that For Patrick Le Juste, on the other hand, continue, together, to defend the val- politicians don’t see the difference be- this was “THE” question of the day: the ues we stand for, in good health and tween an entrepreneur and a criminal. hurdles posed by disclosure, giving up prosperity. confidentiality and being prepared to The findings of the Heath Report clearly be fully transparent. There is no solu- show that advisors will be having more

Diane JACOBS Cosima F. BARONE Nucleus (Holdings) SCA FINARC SA www.nucleus.lu — [email protected] [email protected] — www.finarc.ch MIM3 Luxembourg SA GSCGI/SAIFA www.mim3.lu — [email protected] [email protected] — www.gscgi.ch

______TRUSTING N°7 – January/June 2015 45 UP IN THE NEWS / Regulatory and Legal Evolution

Financial Advice in Europe under MiFID 2 – key changes

Summary: • Europe moves from regulating product selling to regulating financial advice. • MiFID2’s suitability standard emphasizes assessments of customers’ risk tolerance and ability to bear investment losses. • MiFID2 provides for ‘independent advice’, bans commissions when advice is provided on an independent basis. • Commissions for non-independent advice are still allowed. This creates an opportunity for business model arbitrage and will impact negatively independent advisors and, ultimately, harm investors. • The regulation of financial advice is aligned with the standard six-steps financial planning process. • The MiFID2 framework is still to be completed with detailed rules, regulatory and implementing technical standards. The new regime will become effective on January 3, 2017. Lubomir Christoff * * * Ph.D., ChFC®

Europe responded to the Global Finan- financial consumer protections, includ- Lubomir Christoff, PhD, ChFC cial Crisis (GFC) with a slew of Directives ing those around advice. As a result the is a co-founder and Chairman of and Regulations, some of which will emerging European regulatory frame- the Institute of Certified Financial change the way financial advice is de- work could be summed up as follows: Consultants (ICFC) in Bulgaria livered to the Europeans. Chief among (http://idfk.org). The Institute is 1. Europe moves from regulating prod- them is Directive 2014/65/EU (known the only non-governmental body in uct selling to regulating financial ad- as MiFID2). vice; Bulgaria granting financial planning In a 2009 review of the financial mar- certification to individuals who have 2. Europe adopts a more detailed dis- kets, the European Commission sig- met education, examination, experi- tribution of product regulation, in- naled, among others, the problem of ence and ethics requirements. cluding a more elaborate suitability the reliability of advice and “the inbuilt standard and Christoff is a member of the Securi- conflict of interest faced by advisors ties Markets Stakeholder Group at due to remuneration systems that can 3. The new financial advice regulation bias them towards selling particular fi- is aligned with the standard six-steps ESMA (www.esma.europa.eu) nancial products.” To address this and financial planning process, which Contact him at [email protected] other problems consumers in the fi- has been promoted by professional or @LChristoffChFC. nancial markets face, European legisla- associations worldwide for over 40 tors are in the process of strengthening years.

______46 TRUSTING N°7 – January/June 2015 Regulatory and Legal Evolution / UP IN THE NEWS

1. Europe moves to regulating financial advice Prior to the GFC financial planning was not regulated on a European level. In- stead selling of investment and insurance products was regulated. It was a patchwork of vertical regulations with gaps between them. Where investment advice was regulated under MiFID1, selling of insurance products, including investment products with insurance wrappers, were regulated differently under IMD1. IMD1 applied only to insurance brokers but not to employees 2. The new European Suitability from receiving commissions or non- of insurance companies. Mortgage ad- monetary benefits from third parties. vice was not regulated at all. Standard Commissions and inducements. In 2009 the European Commission As before, under MiFID2 investment MiFID2 does not go as far as UK or The proposed a “horizontal approach” to firms will be obliged to “act honestly, Netherlands to ban commissions al- “both mandatory disclosures and sell- fairly and professionally in accordance together. When a non independent ing practices” with a view to promoting with the best interests of its clients” [art advice is offered, commissions are - al consistent outcomes regardless of the 24 (1)]. As before, in order to provide lowed, provided the advisor can dem- legal form of the product or the distri- suitable services and products, invest- onstrate that they are “a) designed to bution channel employed.” In practice, ment firms will need to gather informa- enhance the quality of the relevant ser- such a horizontal approach is in the tion on their clients’ knowledge and ex- vice to the client and b) do not impair process of being implemented using perience in the investment field, their compliance with the investment firm’s the MiFID definition of ‘advice’ and con- investment goals and financial situa- duty to act honestly, fairly and profes- duct of business provisions as a bench- tion. sionally in accordance with the best in- mark and spreading them to other sec- The new wording of the MiFID2 suit- terest of its clients...” [art. 24 (9)]. tors and products such as insurance ability standard, however, strongly While these requirements are consis- and credit. While each financial sector emphasizes the requirement that firms tent with the Directive’s intent to pro- will continue to be covered by its own and advisors assess both clients’ risk tect investors, their effectiveness will Directive, advice and sales will be regu- tolerance and capacity to bear losses depend crucially on the specific cir- lated in the same fashion modeled af- to the extent that article 25 (2) repeats cumstances and situations considered ter MiFID2. this requirement twice. when determining whether the “quality By covering selling practices of all retail Independent advice. MiFID2 intro- enhancement” test and the “do not im- financial products irrespective of their duces the notion for independent ad- pair compliance with the best interest legal form, the European regulation vice, which is somewhat simpler com- duty” have been met. moves to de facto regulating financial pared to the one applied in the UK. For Information to clients. MiFID2 con- advice. the investment advice to be indepen- tains detailed requirements on provid- dent, the firm will need to “asses a suf- ing clients with information about in- ficient range of financial instruments vestment advice, financial instruments, available on the market which must be costs and charges as well as informa- sufficiently diverse with regard to their tion as to “(iii) whether the investment type and issuers or product providers firm will provide the client with a peri- to ensure that the client’s investment odic assessment of the suitability of the objectives can be suitably met...” art. 24 financial instruments recommended to (7a). Independent advisors are banned that client” [art. 24 (4) (a) iii].

______TRUSTING N°7 – January/June 2015 47 UP IN THE NEWS / Regulatory and Legal Evolution

3. The European financial advice The 6-steps FP process MiFID2 provisions regulation is aligned with the six- 1. Establishing and defining the The investment firm shall establish a record that includes the client-planner relationship document or documents agreed between the investment firm steps financial planning process and the client that set out the rights and obligations of the parties, and the other terms on which the investment firm will MiFID2 provisions around investment provide services to the client. [Art. 25 (5)] advice, and by extension the provisions 2. Gathering client data, including When providing investment advice or portfolio management, goals. the investment firm shall obtain the necessary information of other Directives, regulating advice, regarding the client’s or potential client’s knowledge and are fully aligned with the standard experience in the investment field relevant to the specific type of product or service, that person’s financial situation includ- six-steps financial planning process as ing his ability to bear losses, and his investment objectives shown in the table below. including his risk tolerance so as to enable the investment firm to recommend to the client or potential client the investment services and financial instruments that are suitable for him and, in particular, are in accordance with his risk tolerance and abil- 4. MiFID2 – to be continued... ity to bear losses. [Art. 25 (2)] 3. Analyzing and evaluating your Suitability test – Same as above [Art. 25 (2)] Directive 2014/65/EU (the MiFID2 direc- financial status. tive) was published on June 12, 2014 4. Developing and presenting When providing investment advice, the investment firm shall, and entered into force 20 days later, financial planning recommenda- before the transaction is made, provide the client with a state- on July 2, 2014. EU Member states will tions and/or alternatives. ment on suitability in a durable medium specifying the advice given and how that advice meets the preferences, objectives have to transpose MiFID2 provisions and other characteristics of the retail client. (“Reasons ‘Why?’) into national law by mid 2016 and the [Art. 25 (6)] new rules will become effective on 5. Implementing the financial plan- Best Execution obligation: [Art. 27] January 3, 2017. MiFID2, however, is ning recommendations. only the framework directive establish- 6. Monitoring the financial plan- The investment firm shall provide the client with adequate ning recommendations. reports on the service provided in a durable medium. Those ing principles. From here the European reports shall include periodic communications to clients, Commission will continue working on taking into account the type and the complexity of financial instruments involved and the nature of the service provided to a new implementing Directive (Level 2 the client and shall include, where applicable, the costs associ- Directive), specifying in more detail the ated with the transactions and services undertaken on behalf of the client. new rules needed to implement the principles. To do that the Commission will rely on Technical advice provided by ESMA (The European Securities and Markets Authority). Following the publication of the Level 2 implementing Directive, at Level 3 ESMA will develop Regulatory and Implementing Techni- cal Standards and may issue non-mandatory Guidelines and Questions & An- swers papers to further clarify certain provisions and achieve convergence of supervisory practices across the Euro- pean Union.

Lubomir Christoff, ChFC

______NOTES: Source: Clifford Chance, (2014, June) “MiFID2 and MiFIR – expected timeline.” Directive 2014/65/EU of the European Parliament TIES, (2009), “ON THE FOLLOW UP IN RETAIL FINANCIAL SERVICES TO THE CONSUMER MARKETS SCORE- and of the Council of 15 May 2014 on markets in BOARD”, p. 12 financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU. COMMISSION OF THE EUROPEAN COMMUNITIES, (2009),COMMUNICATION FROM THE COMMISSION TO COMMISSION OF THE EUROPEAN COMMUNI- THE EUROPEAN PARLIAMENT AND THE COUNCIL, PACKAGED RETAIL INVESTMENT PRODUCTS”, ”, p. 9

______48 TRUSTING N°7 – January/June 2015 FIRST MOVERS WILL ALWAYS CHANGE THE WORLD. BUT WHICH ONE?

>> Discover our approach at juliusbaer.com/visionary-thinking

Julius Baer is the leading Swiss private banking group and present in some 50 locations worldwide. From Dubai, Frankfurt, Geneva, Guernsey, Hong Kong, London, Lugano, Monaco, Montevideo, Moscow, Nassau, Singapore to Zurich (head office).

Mars125Y_GSCGI_EN_209-9x292-81_100215.indd 1 11.02.15 10:02 UP IN THE NEWS / Regulatory and Legal Evolution

The Juncker Commission: a commitment to make a difference

The Juncker Commission was voted & pensions insurance agents and brokers, into office with a commitment to make investment agents and brokers, indepen- a difference: to do different things and dent financial advisers, financial plan- to do things differently. ners, etc.) through 19 national trade as- Citizens expect the EU to make a dif- sociations from 18 EU Member States. ference on the big economic and so- A survey was conducted last year based cial challenges – high unemployment, on 1,245 intermediaries and 3,124 con- slow growth, high levels of public debt, sumers (existing and/or potential cli- an investment gap and lack of com- ents of intermediary members of FECIF) petitiveness in the global marketplace. across ten EU Member States and it They want less EU interference; they indicates that 37% of the total num- also expect the EU to be more open ber of consumers contacted prefers to and accountable about what it does deal through an intermediary because and how it does it. of the personal attention they receive This Commission is determined to focus during face-to-face meetings. on the ‘big things’ like jobs and growth, When there is a crisis, lack of economic in line with the ten priorities of Presi- growth, increasing unemployment – dent Juncker’s Political Guidelines. regulation and more regulation is not This is the political engagement of the right answer. President Juncker and, on that basis, New regulations do not boost invest- Vincent J. Derudder the EU wants to rebuild confidence and ment, nor retain or create jobs. to regain the trust of EU citizens. Citi- Honorary Chairman zens will judge the Juncker Commis- Most of the regulatory initiatives of the sion by its engagement and delivery, EC have been excessively burdensome Chair of the Consultative Committee and on the improvements they see in for our members, with no real or per- their own lives as a result. ceived benefit for their clients, who are paying the disproportionate costs of Member of the EC Expert Group This is why this Commission is making a such extra regulation. political priority of lightening the regu- on exchange of financial accounts information latory load; the ambition is to overhaul This is why we put so much hope in the rules to make sure they contribute the outcome of the REFIT Plan – hop- to the jobs and growth agenda. These ing that the EC leadership will show the rules should not impose unnecessary ambition to target at least 50% of ex- red tape or administrative burdens isting regulations as being ineffective, while, at the same time, they must counterproductive and too costly for bring the benefits that citizens expect. the people of Europe. The “Fédération Européenne des Con- We fully agree that there are weak- seils et Intermédiaires Financiers” nesses in the existing regulatory and (FECIF) was established in Brussels in supervisory framework but mainly be- 1999 and represents more than 230,000 cause existing rules are not properly European financial intermediaries (life applied by the regulators - bureaucrats

______50 TRUSTING N°7 – January/June 2015 Regulatory and Legal Evolution / UP IN THE NEWS

not close enough to the reality of the fi- FECIF has repeatedly complained about amongst distribution channels as well nancial world to understand where the the fact that no one single representa- as the number of products and services real problems lie. tive of the financial intermediaries’ sec- offered by distributors. tor has been appointed to the so-called We fully support the ambition of the In the past, the EC presented several stakeholders’ group of ESMA, the super EC to strengthen our clients’ protec- programmes for “Reducing Admin- tion, to protect the interests of citizens, agency created by the EC. istrative Burden on Businesses” as investors, consumers, workers and We are of the opinion that the bureau- without, honestly, much success. taxpayers. However, we would like to cratic oligarchy supervising the finan- I quote: “The Commission ascertains see each legislative proposal, put for- cial services industry has succeeded in that unnecessary and disproportion- ward by the EC, to be designed in such preventing a true dialogue between all ate Administrative Costs may hamper a ways to affect all parties of the in- of the actors, which is viewed by our economic activity and/or irritate busi- dustry equally: too often the small and members as another mockery of de- ness, citizens and public authorities. medium-sized enterprises (SMEs) - our mocracy. Measuring and reducing Administra- members - are paying the “dear price” For too long, “big is beautiful” has been tive Costs would decrease overall cost of complying with new regulations as the EC concept but our members are of doing business; allowing additional opposed to the large financial institu- not prepared to accept as a business investment and innovation, which in tions, which can easily afford some ex- model for good compliance, excel- turn would improve productivity and tra costs that are, anyway, passed on by lent governance and high ethics what competitiveness...... As a matter of fact, them to the consumers. seems to be the privilege of some “big this mission is part of a comprehensive Regulation is largely responsible for the and beautiful” institutions whose integ- strategy on better regulation that the loss of 500,000 jobs in our industry and rity is indisputable... Commission launched back in a very sharp reduction in the number 2001 (!) in the context of the Lis- The path to hell is often described as of financial intermediaries (130,000 less bon Strategy for growth and jobs.” one paved with good intentions. It since the beginning of the crisis). seems the case with the previous Com- Very sincerely, good luck Mr Juncker! To better manage the consequences of mission tsunami of regulation: over- the crisis a certain amount of flexibility regulation, gold-plating and excessive in the regulatory process would allow compliance explain the growing popu- our members time to adjust to the new list vote across Europe and an increas- situation. ing anti-European feeling. The pressure of the “politically correct” The end result of this strategy is restruc- is such - as is so evidently expressed turing, recruitment freezes, job cuts Vincent J. Derudder by the ESAs guidelines - that it leads and consolidation, plus the risk that a Honorary Chairman to an absence of proportionality in the number of SME providers will exit the implementation of regulation. market; thus reducing competition Chair of the Consultative Committee Member of the EC Expert Group on exchange of financial accounts information

“ ...Regulation is largely responsible for the loss of 500,000 jobs in our industry and a very sharp reduction in the number of financial intermediaries: 130,000 less since the beginning of the crisis... ”

______TRUSTING N°7 – January/June 2015 51 UP IN THE NEWS / Regulatory and Legal Evolution

The Impact of RDR on the UK Market The Heath Report

At its launch, the Heath Report prom- gested the number was 12m, which ised to issue an interim report at the many within the advisory community end of July to explain the basic effects thought was high. But, the 12m did not of RDR on the access for advice for con- include those consumers who had only sumers. used non insurance products like Unit Trusts and Investment Trusts. The full report will provide more detail as well as concentrating on the lessons Using consumer facing research, it is learnt and need for better accountabili- now clear that almost 16m consumers ty in financial services regulation. It will have used the IFA Sector at some time. be issued early March. This makes the ABI numbers wholly credible and, in addition, we also learn The Heath Report is being helped by that almost 6m UK Citizens have used a number of research companies who the IFA Sector in the last 5 years. are willing to help by using client re- Garry Heath MCIM search to underpin our research. Every The number of consumers who have used banks is currently sketchy. The Garry Heath was Director General of The IFA statistic in this report has been cross Association, 1989 – 1999, which enjoyed a matched by more than one piece of Heath Report seeks better statistics in membership of over 60% of UK IFA Practices. research. That said, in some cases the this area for the final report At its height, the IFAA had 16 staff and a turn- sample sizes are small; additional re- The Heath Report would like to thank over of nearly £2m. search is now to be commissioned in Panacea, Action Consulting (UK), ABI Garry was a central player in the introduction order to improve understanding and IMAS and GfK – RDR 360 for their help, of regulation into the financial services industry substantiate current statistics. and was instrumental in the reform of FIMBRA support and encouragement. and the creation of the PIA. He also was a wit- The Heath Report hopes to give a voice It would also like to thank the ex-mem- ness to 4 Parliamentary Select Committees and to those who are often ignored by the bers for Adviser Alliance and a number the joint parliamentary committee that created the Financial Services & Markets Act. current regulatory policy process - The of individuals for their financial sup- Consumer. port. He has been awarded “Outstanding Contribu- tion to the Financial Services Industry” for 8 Further financial support is urgently concurrent years and awarded 5 other Financial Substantiation needed see http://www.theheathreport. Services industry awards. He created the Finan- com/funding.html cial Services department of BIPAR which still The information that The Heath Report thrives as the EU body for advisers as well as the uses comes both from advisers but also Financial Adviser 5 Star awards. from face to face surveys with the pub- RDR He represented the Association as its public lic. By combining this information we face including promoting members’ interests to are able to cross reference one set of The regulator is tasked by The Financial Government, the civil service, and regulators data with another and come to a con- Services and Markets Act 2009 to: and made numerous media appearances which included all 4 breakfast television stations, The fident position which can be substan- • protect the consumer, Money Programme, Watchdog and Working tiated. • promote effective competition in the Lunch. An excellent example of this process is interests of consumers in the mar- More recently Garry established and sold two establishing the number of consum- kets national financial services businesses valued at £40m and currently acts as a consultant with ers who have been advised by the IFA • protect and enhance the integrity of expertise in Financial Services distribution. Sector. The ABI Statistics Office sug- the UK financial system

______52 TRUSTING N°7 – January/June 2015 Regulatory and Legal Evolution / UP IN THE NEWS

In an attempt to remove perceived im- perfections in the market, the regulator has forcibly divorced millions of clients from the advice they have historically accessed. How this is seen to be consumer protection is a mystery as is how the loss of over 25% of the adviser establishment promotes effective competition. These numbers are broadly in line with How do Consumers use the IFA Until The Retail Distribution Review the traditional market share figures is- Sector? (RDR), clients and advisers decided the sued quarterly by the ABI. 3.5m IFA basis of their relationship, in particular consumers no longer have an adviser There is an accepted myth that consum- the amount of advice required and the by virtue of their adviser leaving the in- ers need perpetual advice and servic- methodology of payment. RDR has re- dustry since the announcement of RDR. ing. Much of the RDR concept is based moved commission as an option and, In addition, circa 6m banking clients on this myth, as is the whole concept of by doing so, has created a paradigm have lost their access to advice, as over ‘financial planning’. Information given shift in financial services distribution. 70% of bank advisers have been made to the Heath Report seriously challeng- redundant. Finally, the transfer to a fee es that view. based solution has meant clients are The majority of the sector’s historical The Numbers expecting a higher level of service from client bank have not wanted or needed their advisers. The IFA Sector has been used by 16m constant handholding; indeed, many UK Consumers for access to financial As a result, advisers have to significant- consumers only want to be involved advice and products. 12m have used ly restrict the number of clients they with the sector on a transactional basis. products offered by ABI members and can handle. This loss of capacity is still It is from this group that the majority of 6m have accessed the IFA Sector in the playing out in the market. But, capac- disenfranchised clients will come. last 5 years. ity losses will range between 6.5m and It is also the case that IFA Clients are 14.5m. The Banking Sector has its own clients. not one homogeneous mass, nor are The Heath Report is still seeking some In total, Pre-RDR Independent Advisers they universally spread across the UK. reliable capacity figures for this sector and Banking Advisers serviced 23m of Whilst there are geographical areas but a figure of 7m appears initially to the UK’s 40.6m working or retired peo- which deliver quantities of wealthy cli- be a reasonable estimate. ple. Depending on how the structural ents, there are other areas where clients So, of the 64m UK Population: changes currently playing out in the are less wealthy and IFA sector services Independent sector settle, between lower income families. The commission • 40.6m are either working or retired 12.4m and 20.4m clients will lose ac- system allowed such clients to access • 23m of them have accessed advice cess to advice. good advice in an affordable manner. • 16m have used the independent sector… This has now been compromised by RDR. • …and an estimated 7m used banks. Research completed by Impartial Me- dia in late 1990’s revealed that the aver- Disenfranchised Consumers Best Worst age transactional client was triggered Exiting IFA Advisers 3,500,000 3,500,000 to seek advice from IFAs once every 7 years. If the IFA had a regular marketing Clients beyond current IFA capacity 3,000,000 11,000,000 regime including quarterly newsletters Number of Disenfranchised IFA Clients that trigger was shortened to 5 years. (Sub – Total) 6,500,000 14,500,000 The research gives us different con- Disenfranchised banking clients 5,900,000 5,900,000 sumer profiles which may be defined as RDR Disenfranchised Clients 12,400,000 20,400,000 follows:

______TRUSTING N°7 – January/June 2015 53 UP IN THE NEWS / Regulatory and Legal Evolution

The Transactionally Advised: These clients do not seek regular contact, but are triggered to seek advice by an The Impact event. They may be getting married, buying house, receiving an inheritance, of RDR on having new children, seeking a divorce the UK or approaching retirement. They will look at the advice as a specific answer Market to a specific situation, and do not want or expect a holistic service. Therefore, Garry Heath they do not appreciate (or warrant) full ‘financial planning’ services. Clients in this group are most likely to object paying fees as they view advice as a distressed purchase and probably perceive commission based advice as “free”. This group will be the most compromised by RDR. These clients will not wish to have a regular relationship with an adviser, but their adviser is likely to fill the available capacity with the Seri- “High Net Worth”. But, most are actu- ously Advised, who will provide high Co n s u m e r p r o f i l e s ally Mass Affluent. They are also likely levels of regular income. So, when the Clients can be modelled into four cat- to be the group that are most likely to Transactionally Advised wants advice, egories. accept fees. This is the group that may there may be no capacity for them. This They are not born into these catego- have benefitted from RDR. They will group is the most likely to attempt self ries, but elect to go to them by virtue be the clients that advisers, seeking to advise but it is poorly equipped to do it of the amount they have to invest and cut down their numbers of clients, will successfully. seriousness of thought that they apply want to keep. This is the largest group to be disen- to their financial future. The Regularly Advised: These cli- franchised by RDR. There are some investors on reasonably ents take their financial future reason- The Unadvised: The majority of the modest incomes that attain consider- ably seriously and expect regular up- Unadvised are unlikely to have the ex- able wealth by good advice, maintain- dates from their adviser. They probably cess income to save much, and many ing modest out goings and wise invest- expect their adviser to initiate contact. will not protect their families unless the ment. They may not have significant capital benefit is provided by their employer or to invest but are likely to have a healthy Government. The Seriously Advised: These are the income which they will wish to use for clients who have regular and planned savings, pensions and protection. Typi- Historically, advice for this group was meetings scheduled with their advisers. cally, they have been happy to pay their provided by “Industrial Branch” advis- They take the planning of their financial fees through the commission route. ers, who were employed by the likes future seriously and will be aware of is- Now, they face paying for their advice of Pearl, Refuge, and Prudential etc. sues, such as the Inheritance Tax. They via fees, probably less happily. These clients were the first victims of are also likely to run their day-to-day the wholesale loss of advice as a con- This group will face a decision. Either finances in a sensible manner. sequence of previous failed regulatory they will upgrade to the level of ser- interventions. Typically, they would have at least 6 fig- vice of the Seriously Advised, which for ure amounts to invest, they are almost them may be an over provision, or they In theory, they now have access to ‘ad- certainly higher rate taxpayers. In in- will be in danger of being dropped by vice’ from the Citizens Advice Bureau dustry speak - these clients are labelled their adviser. and the Money Advice Service, as well

______54 TRUSTING N°7 – January/June 2015 Regulatory and Legal Evolution / UP IN THE NEWS

as casual advice from their personal impacts on the number of clients each Me t h o d 1: Cu t d o w n t h e n u m - networks. This group has not been af- adviser can handle. A third of the advi- fected by RDR, as these clients were not b e r o f c l i e n t s e a c h a d v i s e r w i l l sory force has adopted the “New Model consumers of advice, except occasion- s e r v i c e Adviser” business model or its deriva- ally from Banks. Research shows that the current IFA tives: top slicing their client banks to market can be split into 3 broad mod- The Self Advised: There is also a small those most willing to pay fees and re- els, with adviser numbers split fairly but increasing group of consumers that ceive high levels of service. evenly between them. The total num- believe they can arrange their invest- For the purposes of this report, we have ber of disenfranchised IFA Clients cre- ments on their own, thanks largely to named them “Boutique Advisers” and ated by loss of servicing capacity is still availability of information via the inter- their clients are likely mostly to be “The unclear, as the effects of RDR are still net. Along with those basing decisions Seriously Advised”. The number of cli- playing out in the market. on guidance from MAS, CAB, etc., they ents per adviser range between 10 and will not have the protection of FOS that At best, the current groups will main- 120, with the average at 65. advised consumers do. This empha- tain their adviser establishment. Bou- The commercial reasoning for the Bou- sises one of the major advantages of tique Advisers will continue, Segregat- tique Adviser is strong. A small number getting advice and, therefore, the sig- ed Advisers will be able to continue to of clients are relative inexpensive to ad- nificance of loss of advice capacity. service their existing client banks prof- minister, and fee levels are strong. As a itably. Undefined Advisers will survive Mobility: Whilst there are few inves- result, many advisers have seen an in- the loss of Trail commission and find a tors who downsize their advice type, crease in overall profitability accompa- way of converting clients sceptical of there are many investors who wish to nied by the less stressful existence. paying fees into fee payers. upgrade in the light of new develop- There are 2 commercial downsides: ments in their lives: retirement, lottery At worst, the Boutique Advisers will wins and inheritances being good ex- maintain their current client bank, the Embedded Value: the business is not amples. The post RDR world will make Segregated Advisers will find segregat- scalable and, therefore, is difficult to sell upgrading far more difficult as there ing client unprofitable and will revert to others. The business is a provider of will be precious little advisory spare ca- to the Boutique model, and the Unde- income, not capital. pacity to allow advisers to accept new fined Advisers will leave the industry Replacement Clients: There is no ready members of the Seriously Advised. when Trail finishes. pool of clients in the business accessing Boutique Adviser Model – Cur- lower levels of service, who may be up- RDR has created 2 methods to rent Capacity: 715,000 Clients: graded if other clients leave. The most RDR compliant model is the It is this model that will represent the disenfranchise clients Boutique Adviser who represents what fallback position for the whole sector the authors of RDR would like the sec- as long as each adviser can find enough tor to become. Boutique Advisers have clients willing to pay fees for advice • Method 1: Cut down the number of probably never had a large number of clients each adviser will service. The Heath Report Survey indicates that, clients. on average, each boutique adviser will • Method 2: Cut the number of advis- However, it is very clear that clients service 65 clients (11,000 advisers x 65 ers available to the public who pay fees expect a high level of ser- clients = 715,000). vice, which is very labour intensive and The Segregated Adviser Model – Current Capacity: 715,000 - 3,300,000: The Segregated Adviser Best Outcome Consumers Worst Outcome Consumers wishes to advise as many clients as Boutique Advisers 715,000 Boutique Advisers 715,000 possible, by segregating them into Segregated Advisers 3,300,000 Segregated Advisers 715,000 different levels of service. In general, there are two basic levels of advice on Undefined Advisers 5,500,000 Undefined Advisers 0 offer. The high service level of the Bou- Total 9,515,000 Total 1,430.000 tique Adviser and a more arms length

______TRUSTING N°7 – January/June 2015 55 UP IN THE NEWS / Regulatory and Legal Evolution

model in which paraplanners and staff There is no future in staying “Unde- Panacea’s first survey indicated that members do as much of the work as fined”. To survive, this group needs to 50% of those firms considered that the possible; thus, enabling the high level upgrade either to Boutique or Segre- loss of trail commission would be cata- skills of relatively expensive adviser to gated. Historically, this is the group strophic to their business. Its planned be used more effectively. The average who was the most likely to be servicing removal in 2016 seriously compromises Segregated Adviser is probably more transactional clients who are the least the viability of this part of the sector, driven by emotion than commercial likely to be capable of paying fees. It is as well arbitrarily destroying the em- necessities, and does not want to aban- also this group who does most for the bedded value of the advisers business don clients, if at all possible. social good, as it drills down to custom- painstakingly built up over many years There are strong commercial reasons to ers who cannot afford more expensive of honest trading. be Segregated. But, the model is not forms of advice such as SME owners. If the FCA wishes to maximise the established. It is heavily system de- This model was perfectly commercially number of disenfranchised clients, pendent. It requires increased working viable until the RDR rules were imposed. the removal of Trail Commission is the capital to fund increased support staff. The demand that clients pay fees dis- best way of doing it. And, it may prove less profitable per cli- proportionally impacts on this group, ent than the Boutique version. If this due to its lack of ready cash. Many of Me t h o d 2: Cu t t h e n u m b e r o f model settles down to be effective and these clients baulk at paying fees for a d v i s e r s a v a i l a b l e t o t h e p u b l i c profitable, the Segregated Adviser will new advice. Therefore, post RDR, those be the way forward for the adviser who in the undefined adviser sector are al- When FSA announced RDR in Novem- wants more than a lifestyle business, as ready experiencing a downturn in new ber 2009, the IFA establishment was it can offer a capital exit in the future. business. 38,750. The current commercial downsides are The costs of maintaining contact with By January 2013, IFA adviser establish- principally access to capital and the de- such a large pool of clients requires a ment had fallen by 7,000 to 31,750, as velopment of systems and processes. regular income to pay for the regular advisers decided to retire or leave the If all the currently Segregated Advisers cost. Trail Commission is invaluable industry either because: are able to maintain this model, each to this group and represents a dispro- • The arbitrary requirement to take and adviser should be able to service 300 portionately high percentage of its in- pass even more exams of question- clients. Therefore, 11,000 advisers x come. able educational value to very experi- 300 = 3,300,000 clients. In the future, Panacea has completed considerable enced advisers and, considering their some or all of this group may revert to research on the impact of the removal average age, unlikely to provide any the Boutique Model. As a result 11,000 of Trail commission. Using standard personal economic advantage; advisers x 65 clients = 715,000. industry statistics, the 11,000 advisers • Or deciding that they would not be The Undefined Adviser Model - will be employed by circa 3,500 firms. able to encourage enough of their cli- Current Capacity: 0 - 5,500,000: The Heath Report indicates each adviser in the “Undefined” group will service The Total Losses an average of 500 consumers. 11,000 Disenfranchised Consumers Best Worst advisers x 500 = 5.5m This Group is the most compromised of Exiting IFA Advisers 3,500,000 3,500,000 the three business model types. Many advisers in this group are in great dan- Clients beyond current IFA capacity 3,000,000 11,000,000 ger of leaving the industry. This group Number of Disenfranchised IFA Clients also has the largest number of clients (Sub – Total) 6,500,000 14,500,000 per adviser. So every adviser exiting from this group will create a consider- Disenfranchised banking clients 5,900,000 5,900,000 able downturn on the capacity of the sector as a whole. RDR Disenfranchised Clients 12,400,000 20,400,000

______56 TRUSTING N°7 – January/June 2015 Regulatory and Legal Evolution / UP IN THE NEWS

ents to move away from commission bank advisers is likely to be less than 5.9m bank clients have disenfran- and towards fees. 2,000. chised by sacked banking advisers Since January 2013, IFA numbers have Establishing the number of consumers So, in addition to the 3.5m clients aban- improved as IFA practices adopt redun- who have accessed advice via the bank- doned by exiting advisers (see above) dant banking advisers so 33,000 is now ing sector is still a challenge. The nature and the 5.9m abandoned banking cli- the accepted number of IFA advisers. of this advice is essentially transactional ents; a minimum of another 3m will be unable to find an adviser with capacity The Heath Report’s own survey cur- and there may be an element of double to work for them. rently puts each exiting adviser’s client counting between the IFA and Banking bank at 500. This may be low in some sectors created by the same client ac- If the current sector either gets smaller cases. So, 7,000 IFA Advisers x 500 = cessing both sectors at different times. by further exits or moving to the Bou- 3.5m. Ex-banking advisers tell the Heath Re- tique model another 8m IFA clients are 3.5m IFA Clients Have Already port that they were expected to meet 4 in danger of being disenfranchised Been Disenfranchised By Exiting customers a working day which would So, between 12.4m and 20.4m UK IFA Advisers give an 800 client per adviser number. consumers have or may lose their 8,656 x 800 = 6.9m. access to FS advice. If the retail banking sector advised 7m The Lost Banking Advisers clients... The numbers of retail facing advisers are not declared on a monthly basis December 2011 8,656 so numbers are dependent on ad hoc speeches by FSA/FCA staff. Since De- July 2013 4,604 cember 2013, a number of banks have December 2013 3,556 announced further redundancies so a April 2014 2,000 reasonable estimate of operating retail Garry Heath

______TRUSTING N°7 – January/June 2015 57 .com - Photo © P. Grenet © P. - Photo .com lasuite-atelier www.

1860

Partenaire de la CIFA depuis 2012 www.chateau-malleret.fr

ChDeMalleret-209,9x292,81-INT2015.indd 1 27/01/15 15:55 Opinion / UP IN THE NEWS

Quando il Promotore Finanziario è donna

Vania Franceschelli è impegnata fin da giovanis- Vania Franceschelli nasce a Castelfranco sima nel settore. Emilia. Sostiene che le donne consulenti e intermediarie finan- È un promotore finanziario del gruppo ziarie sono un fenomeno in Allianz Bank. Laureata in giurisprudenza, crescita, ma anche una garan- è certificata EFA (European Financial Advi- zia di serietà e di stabilità per sor) e EFP (European Financial Planner). il cliente-investitore. Condivide con due professioniste, una com- mercialista e una consulente del lavoro, un progetto professionale tutto al femminile * * * nel cuore di Modena.

Dr.ssa Franceschelli quando ha Impegnata a livello europeo, è responsabile cominciato la sua attività nel set- estero di Anasf, l’Associazione Nazionale tore finanziario e come si è svilup- dei promotori finanziari italiani e membro pata la sua carriera fino a oggi? del board del Fecif (European Federation of VF: Ho iniziato a lavorare in banca gio- Financial Advisers and Financial Interme- vanissima, diventando responsabile diaries) federazione europea no profit che di filiale a 27 anni. Nel frattempo ho salvaguarda gli interessi di 180 mila consulenti e intermediari finanziari, con sede a conseguito la laurea in giurisprudenza Bruxelles. e ho superato l’esame da promotore finanziario. Quindi, dopo pochi anni, Relatrice in vari convegni italiani ed esteri sull’evoluzione delle normative europee mi sono licenziata per svolgere l’attività in materia finanziaria e sull’applicazione alla categoria dei promotori finanziari. È di consulente finanziario che pratico responsabile di Editorial Strategy del gruppo dedicato alle promotrici donne PF al tutt’ora per il gruppo Allianz Bank. Femminile, creato da Advisor Professional, la business community dei promotori Nel 2011, sono entrata nel Comitato finanziari. È responsabile regionale del progetto Economic@mente, rivolto alle Esecutivo di Anasf, l’Associazione Na- scuole medie superiori con lo scopo di insegnare gratuitamente la pianificazione zionale dei Promotori Finanziari, prima finanziaria per tutte le fasi della vita. donna dall’anno 1977, quando è nata l’associazione, dove mi hanno asseg- Impegnata nella salvaguardia del Made in Italy su vari fronti. Presidente dell’Ordine nato il ruolo di responsabile estero; qui del Nocino Modenese; ideatrice del Premio Donne del Nocino giunto alla quinta mi occupo delle normative europee in edizione; è Maestra Degustatrice di Aceto Balsamico Tradizionale di Modena; Dama campo finanziario e dei rapporti con del Tortellino; Sommelier; Assaggiatrice di grappe; vincitrice del concorso enogas- le associazioni di consulenti finanziari tronomico “Il Lambrusco cerca moglie”; Organizzatrice e docente di corsi sul nocino degli stati europei. L’Anafs è certificata abbinato ai vari prodotti tipici del territorio; vice-presidente e segretario Lions EFA (European Financial Advisor) e EFP Wiligelmo Modena; revisore conti Panathlon Modena. (European Financial Planner).

______TRUSTING N°7 – January/June 2015 59 UP IN THE NEWS / Opinion

Un impegno costante e in ampliamento che le è stato riconosciuto anche con il premio Profilo Donna 2014... VF: Rappresentare sul palco del Premio inter- nazionale Profilo Donna, per la prima volta, la mia professione di promotore finanziario è stato un grande vanto per me e un auspicio che, nei prossimi anni, altre donne che svolgono la mia attività siano premiate. Alcuni dati sulla promozione finanziaria al femminile in Italia: rispetto alla fine del 2013 la percentuale di donne iscritte all’albo dei Pro- motori Finanziari è passata dal 17,4% al 18,4% . Oggi sono 9.916 su 53.922 persone che svolgono questa attività. Il dato positivo è che le iscrizioni dall’inizio dell’anno di donne all’albo è stata pari al 30% sul totale. Siamo ancora troppo poche, anche se questa è un’attività tipicamente femminile.

Perché sostiene che è una professione tipicamente femminile? VF: Recenti indagini hanno dimostrato che le promotrici finanziarie di solito gestiscono patri- moni più cospicui rispetto agli uomini, in quanto trattiamo i risparmi delle persone come se fossero dei nostri figli. Ci concentriamo maggiormente sulla gestione del cliente. Il 72% dei clienti intervistati ha dichiarato che rac- comanderebbe il proprio promotore donna ai loro amici, in quanto molto affidabile, di fiducia, -com petente e in grado di migliorare sensibilmente la gestione finanziaria. Anche nel nostro passato era la donna (nel modenese chiamata “rezdora, reggitrice”) a occuparsi dell’economia della casa. Ancora oggi il sesso femminile è all’origine dell’80% delle decisioni di Sono l’unico membro femminile del board del Fecif (European Federation acquisto e di risparmio all’interno della famiglia. of Financial Advisors and Financial Intermediaries), federazione europea no profit che salvaguarda gli interessi di 180.000 consulenti e intermedi- Statistiche molto interessanti che evidenzia- ari finanziari,con sede a Bruxelles. no anche in questo ambito l’emancipazione Sono relatrice in vari convegni italiani ed esteri sull’evoluzione delle nor- della donna? mative europee in materia finanziaria e sull’applicazione alla categoria VF: È chiaro, la mia non è una professione che dei promotori finanziari e, da un anno, sono Editorial Strategist di “PF al s’improvvisa, anzi la maturità aiuta a evitare tanti femminile”, community “in rosa” creata dalla rivista Advisor per promotrici errori. finanziarie. Per finire, sono responsabile regionale progetto Economic@ mente rivolto alle scuole medie superiori, con lo scopo di insegnare gra- L’attività di consulenza finanziaria purtroppo non tuitamente la pianificazione finanziaria per tutte le fasi della vita. esercita la stessa capacità di attrazione tra donne

______60 TRUSTING N°7 – January/June 2015 Opinion / UP IN THE NEWS

e uomini, in quanto non si ha, e non è solo un problema italiano, un’adeguata percezione della professione. Mi hanno recentemente commissionato una ricerca sulla consulenza finanziaria al femminile nel mondo e, salvo casi sporadici, non ho trovato materiale in Europa, ma solo negli USA. Da qua la volontà di sviluppare questo tema non solo in Italia. Noi donne dobbiamo im- parare a fare sistema, cercando di col- laborare per ridurre al minimo o addi- rittura eliminare le discriminazioni che ci portano a vivere in ambienti poco fa- vorevoli, individuando gli ostacoli che creano disparità.

Quali sono i punti discriminanti che lei, in quanto donna, ha trovato nel suo percorso? VF: Quando mi vengono richiesti degli interventi sul perchè ho scelto questa professione, spesso dalla platea mi vi- ene rivolta sempre la stessa domanda, e per lo più da una donna “Ma lei è sposata?”. Domanda a cui segue sempre la seguente affermazione “Signora, lei avrebbe chiesto la stessa cosa ad un uomo? Non le rispondo in quanto questa è una prima forma di discrimi- nazione, che proviene da un retaggio culturale diffuso, quello che non si pos- sa conciliare lavoro e famiglia!”. Bugie... Certo, ci vuole pazienza e fiducia in se stesse per conciliare il tutto, ma questo fa parte della vita e di chi vuole viverla pienamente.

Quindi cosa consigliamo alle gio- vani che vogliono intraprendere sioni, per lo più su temi economici, a cui tutti possono aderire. questa attività? Cosa si auspica per il futuro nell’ambito finanziario? VF: Credo molto in questa professione VF: Che molte famiglie italiane, nei prossimi anni, abbiano, oltre al medico, al com- e credo ancora di più nell’aiuto che io e mercialista e all’avvocato, un promotore finanziario, che le aiuti a programmare i altre mie colleghe possiamo dare come bisogni e a renderle più consapevoli della gestione dei risparmi. Naturalmente, se il attività di mentoring alle ragazze/don- consulente è una donna competente, il risultato è assicurato. ne che si accingono intraprenderla. Per questo abbiamo creato all’interno della ______rivista on-line Advisor, la community PF al femminile, in cui lanciamo discus- Interview orginally published in PROFILO in December 2014

______TRUSTING N°7 – January/June 2015 61 UP IN THE NEWS / Opinion

Are You Ready for a New Dawn? Managing Client Expectations for Competitive Advantage

Since the dawn of civilisation mankind ticular attention on strategic elements, 1953. It is still used by marketers today has engaged in business activities in one such as: to describe the elements that a firm will form or another, from the simple historic (i) product attributes, combine to promote the unique selling barter arrangements to the sophisticat- points that differentiate their product ed international financial transactions (ii) cost structures and pricing from their competitors. In the 1960’s we engage in today. Over the millennia (iii) sales propositions Boden’s concept was refined by E. Je- the systems employed in the conduct of rome McCarthy, professor at Michigan (iv) distribution channels. business have evolved and transformed State University, to the four “P”’s. The as new methods developed and market classification of the basic four elements expectations changed. Accordingly the The manipulation of these elements is is as follows; Product, Price, Promotion principles of business have been altered at the core of the marketing strategy. (sales & advertising) and Place (distribu- as society became more highly devel- It is commonly referred to as the mar- tion). Further classifications have been oped and the buyer /seller relationships keting mix or the four “P”s of market- introduced to this model over time to became more complex. However, one ing. The term marketing mix was first include elements relating to the mar- fundamental principle of business has coined by Neil Borden, the president of keting of commercial services. Various endured throughout the ages. That is the American Marketing Association in adaptations of the model have been the principle of competitive advantage.

The Principle of Competitive Advantage In order for any business to create and preserve an advantage over its competitors it must have at least one differential factor. Customers must perceive this differential factor as sufficiently more attractive so that it encourages them to transact with this firm rather than the competing firms. All firms have to be acutely aware of this enduring principle if they want to succeed. Significant monetary resources are devoted to this challenge each year in an effort for firms to improve their competitive positions. In particular we see large corporations and product manufacturers deploying trillions in annual budgets across key facets of their organisations in order to establish and maintain a competitive advantage in their market. These firms focus par-

______62 TRUSTING N°7 – January/June 2015 Opinion / UP IN THE NEWS

introduced, but the basic elements, sors (IFA’s). So the world is changing. uct and professional advice it is impor- namely, the four Ps, have continued to Another new dawn is now approaching tant to first understand the difference dominate product marketing strategies on the horizon. This new dawn marks between the two. It may sound like in one way or another. But, the world is the beginning of a new era where we common sense but unfortunately the changing, and in particular the world will see a greater need for many institu- difference is not always clearly recog- of financial products is changing. With tions and firms to transform the role of nised by all the parties in the process, change comes the need for alternative the product sales advisor into the role including both sales advisors and cli- thinking. of the financial planning advisor. Com- ents. Many text books offer suitable mission based Financial Brokers, Tied definitions of the difference between Agents and Independent Financial Ad- products and services, all of which are Transition from Industry to visors may also need to transition their worthy. But, I favour my own definition, Profession business from a total reliance on prod- as follows: A product is a tangible item uct sales transactions to knowledge that has a physical nature to its use and In the financial industry the product based service transactions. consumption, where as a service is an producers have employed the four P’s intangible provision or offering that Such a change may be easier for some model to emphasise the unique attri- has an experiential nature to its use and firms rather than others, as evidenced butes of their offering. The challenge consumption. In other words, a prod- in the Netherlands and also in the has always been which elements to ad- United Kingdom with the introduction uct exists and can be judged physically, just so that customers are sufficiently of the RDR in 2013. Firms that have al- whereas a service occurs and has to be motivated to give priority to the firm’s ready educated their clients in relation experienced. products above rival products in the to the characteristics of charges relat- So the question is how a professional fi- buying process. ing to both the investment service and nancial advisory firm can exhibit a def- The necessity to comply with regula- the financial instrument will find the erential factor when competing solely tion in the industry has a direct influ- transition easier. For others, facing this on the basis of providing an advisory ence on how the product producers task will require a metamorphosis of service. What will the client perceive set about manipulating the individual the individual product sellers and com- as the differentiating factors of the fee elements in the marketing mix for their mission sales advisors into professional based advice? financial products. The introduction of fee based advisors. In answering this question it is essen- revised regulation in MiFID II now poses If organisations are to embrace the tial to gain a clear understanding of the additional challenges for the industry change it will require a shift in think- value the client will expect from the as it brings with it a greater emphasis ing across several groups, including, service proposition. The aim is to then on transparency in relation to a distinc- senior executives, employees and self make the value proposition appealing tion between the financial instruments employed. This means an evolution in to the client so that it will match the cli- and the investment advisory service mind set as personnel migrate from the ents’ expectations. provided. product industry to the advisory pro- In particular, this new challenge will fession. influence how a firm will adjust its Deferential Factor of Advisor product marketing strategy in relation Service to “promotion” and “place”. This has a From Product Sales to Advisory The traditional marketing mix used to direct impact on the customer facing Service sell investment products will now need personnel that perform the sales func- to be altered. So the task will be to tion for financial products and operate Adapting to the change will lead to a demonstrate the deferential factor by in the channels of distribution. new challenge for firms and IFA’s in introducing elements to the marketing terms of gaining and retaining com- A significant range of personnel will be mix that are more closely aligned with petitive advantage as a professional affected, including the Financial Sales the expectation of the client rather than service rather than a product retailer. Advisors and the commission based the desires of the product producer. To Agents, along with the Financial Bro- If we are to understand the impact of make this process easier we can substi- kers and Independent Financial Advi- this separation between financial prod- tute four alternative elements, namely,

______TRUSTING N°7 – January/June 2015 63 UP IN THE NEWS / Opinion

Solution, Value, Information, and Ac- and identify the deferential factors. It and facilities, using technology systems cess. These four elements are more is then a matter of ensuring that the and communications methods that a focused on the customer (demand side) service performance meets and then client would expect to see in a profes- and can replace the product focus of exceeds the clients’ expectations so sional service firm. the four P’s (supply side) in the market- as to secure a competitive advantage. ing mix. Therefore the advisor will have to con- • Product - becomes - Solution centrate more on providing the client Managing Expectations with advice that will help the client to If the advisor is to concentrate more • Price - becomes - Value find a solution to their particular needs on the provision of client centric solu- and wants. The advisor will also need • Promotion - becomes - Information tions rather than product centric solu- to ensure that the solution meets the tions then this raises the question of • Place - becomes - Access clients’ expectations in terms of value. the advisors skills set. This new era will The client will expect the advisor to call for additional training as many ad- The mix in this alternative model allows provide appropriate information about visors will need to acquire additional the advisor to demonstrate a matrix of the service, rather than product data skills in order to be successful in migrat- service elements that provides the cli- and advertisements. Clients will further ing from product commissions to fees ent with measures by which they can expect to have access to the advice, in based advice judge the service. It makes it easier a manner deemed appropriate to the for the client to compare the advisor provision of professional service, e.g. Above all advisors will need to reach a against competing advisory services using appropriate consultation tools higher understanding of client expectations – and a specific understanding of how to manage these expectations. To understand the process of managing client expectations it is important to first be aware that expectations are inspired by elements that have conditioned the clients thinking. The process is relatively straightforward when the client is not acquainted with the professional service being offered, because there is little or no pre-conditioned thinking. On the other hand the process can be more complicated when the client has been preconditioned by past exposure to, and/or perceptions of, the service. For example existing clients of a firm have already formed expectations of the service offered by that firm. In these cases it may be necessary to carry out a re-conditioning of the clients’ thinking in order to manage their expectations. This is possible once the key principles are understood and the correct methods are employed. (The Principles and Methods require a greater explanation at a level of detail outside the scope of this article).

______64 TRUSTING N°7 – January/June 2015 Opinion / UP IN THE NEWS

Advisor or Seller = Doctor or similar fashion to the medical profession. That is to expect fees for profes- Pharmacist? sional advice whether a product is re- We have established that a professional quired or not, and to pay separate fees advisory service can attain and retain for products where they are needed. competitive advantage by identify- Where a Financial Practitioner recom- ing, matching and exceeding a client’s mends a product to the client (e.g. the expectations. We have also identified Doctor writing the prescription), then it that the client’s expectations are in- should be expected by the client that fluenced by conditioning. It may help they will have to pay to receive this ad- understanding if we put this into con- vice. Where the Financial Practitioner text by comparing the provision of pro- arranges a specific product on behalf fessional fee based financial advice to of the client (e.g. the Pharmacist admin- the provision of professional fee based istering the medication), then it should medical advice. also be expected by the client that they will have to pay to purchase this prod- Generally speaking all clients are famil- uct. Richard Crotty iar with using the advisory services of FMII MIITD QFA APA their family Medical Doctor (MD). They Where the financial firm is regulated expect that when they seek advice to do both then it may be possible to Richard Crotty is a serial entrepreneur having founded his first company when he was 20 years from the Doctor that the first step will charge two separate fees for the service of age. He has over 30 years experience in stra- be a diagnosis. Following the diagno- and the product. Provided the client tegic business growth, with particular focus on sis a course of remedial treatment will has agreed to receive both and where enterprise development and business transition. be recommended. The implementa- the clients’ expectations have been He is a director and shareholder of a number tion of the treatment recommended matched. Of course this is subject at all of companies that span various business sectors including; Scientific Research, the IT & Inter- by the doctor may simply require some times to the Financial Practitioner op- net industry, Training & Business Consultancy, change in behaviour from the patient erating in compliance with the relevant Healthcare and the Financial Services sector. without the need for medication. The regulations. To date his business activities have covered nu- patient will pay the doctor an agreed merous geographic markets including Europe, fee for the advice received. Japan, Scandinavia and the USA. Richard is the founder of Hawkeye eLearning, If on the other hand the course of treat- (www.hawkeye.ie) an online training firm that ment requires a prescription of medi- offers knowledge and skills training along with cation then the patient will also attend learning management solutions to businesses a Pharmacist to purchase the medica- across many areas. He is a certified life & busi- tion prescribed by the Doctor. In this ness coach and is also the founder and Managing Partner of Crotty & Company, a management instance the patient will pay the Doctor consultancy firm offering business advice and (Advisor) for the advice received and will fiduciary financial planning consultancy to busi- also pay the Pharmacist (Product Seller) ness owners and private clients. for the product. There is no expecta- Richard is a past student of financial planning, tion of free advice from the Doctor or business management, behavioural science and free medication from the Pharmacist. psychology. He is a member of Menza Interna- Why? Because the medical profession tional and is the Irish representative on the Inter- national Knowledge Circle of the FPA (Financial has always charged for advice and the Planning Association). He is the originator of Pharmacist has always charged for the the KITA Principle and author of the personal administration of medication. The pa- finance handbook: Money“ Matters for Life”. tient has been conditioned to expect As an energetic & humorous presenter Richard these charges. has designed and delivered many business train- Richard CROTTY ing programs, and has addressed audiences on The challenge for Professional Financial a range of topics in Ireland, France, Germany, Practitioners is to condition clients in a [email protected] Sweden, the Netherlands, Hungary and the UK.

______TRUSTING N°7 – January/June 2015 65 UP IN THE NEWS / Opinion

The 4 Myths of the RDR

In January 2013, the full impact of the ucts so they can be paid. No conflict Retail Distribution Review hit the there then! UK Advisory market. In the 2 years since then, we have had time to reflect Myth 2 – To be Independent, you on the Lies, Damned Lies and Myths have to know everything about about the RDR, both from the UK and every product all the time – even from other jurisdictions, especially the ones you will never you use those facing similar changes for your clients. Please don’t take this article as either This insidious lie took over from Myth a defence of all the detail about RDR 1 when the FSA announced that Myth or indeed of the regulator. The UK has 1 was a lie. Again, the Fund Managers made mistakes, and is in the process of and peddlers of products continue to correcting at least some of these. push this lie, which is then usually fol- BUT, and it’s an important BUT, I be- lowed by a conversation about going lieve it to be vital that we deal with the Restricted, and using them – and only them – as the choice of Fund Manager RDR rules and facts as they are in real in that particular sector. The question life, and not what the blogs or some of should always be ‘Who Benefits?’, and the more extreme Product Providers here the beneficiary from misrepresen- and other interested parties say or wish tation is potentially product providers. they were. a) based on a comprehensive and NOT the client! fair analysis of the relevant In truth, if you understand SIPP’s, or Myth 1 – To be Independent in the market; and VCT’s or Offshore bonds in concept, you UK, you have to sell everything b) unbiased and unrestricted.” can decide whether that particular cli- on the Market ent has a need for that type of (generic) Sorry, but this is complete rubbish. Can anyone actually tell me what the product. If not, game over. If yes, then This particular myth is much beloved real problem is? But, we keep being clearly additional research is required. by those peddling unregulated Brazil- told that the FCA has changed the Easy. ian teak funds that prove to actually be rules so that everyone has become junk bond funds based in Costa Rica, Restricted. Sorry, but that is complete The ‘trick’ is to have clear, consistent for example. We’ve all had the emails. and utter tosh. 90% of firms that were Investment Philosophy that can be Independent prior to the RDR are Inde- communicated to clients and used to Can we look at the rules? pendent now, our firm amongst them. set out criteria to filter out the vast ma- The new rule on independent advice And we don’t think it is difficult. And jority of the investment universe. Ap- states that: our clients love it. And yes – we did ask parently, there are 40 000 collective in- them! vestments to choose from in the EU. To “A firm must not hold itself out to say we will review each one, for every Comprehensive and fair analysis does a retail client as acting indepen- client, for every transaction is just plain NOT mean a detailed understanding of dently unless the only personal silly. It’s even sillier to say we should recommendation in relation to re- every fund and every product. carry around the details of each one in tail investment products it offers This part of the Myth is peddled by pro- our heads at all times. Let’s be honest, to that retail client are: viders who need us to sell their prod- despite the protestations of the Money

______66 TRUSTING N°7 – January/June 2015 Opinion / UP IN THE NEWS

Industry, the choice of fund manager Assurance is higher through Restricted is almost completely irrelevant. What Advisers. That is, the same policy, of- matters is the product / tax wrapper fered by the same Product Provider, at and asset allocation. That is the stuff we the same terms and conditions is cost- must understand, and be able to make ing consumers more money. robust, clear recommendations about. So restricted may be easier for some We can then research – using the tools larger firms, but there is no clear evi- available / panels – the right manager / dence that consumers are seeing the fund for that particular case. benefit of this. So set sensible filters, and connect In the longer term, the UK IFA sector them explicitly to the needs and profile What else can we save significant has long been the consumer’s best of your client base, or of segments of it, amounts on? And I mean what else friend, the consumers’ guardian from in any case. that will knock 20% or 30% off our the worst of the ‘Money Business’. And costs? Our big bills are staff, FSA / FSCS if the ‘Money Business’ succeeds in kill- Myth 3 - It’s all about ‘fees’ fees, rent and rates. I can’t see how any ing off the Consumers’ best friend and of that could change – can you? And Here I mean direct fees from the client, guardian, then it’s open season – again please do not tell me research! That is – on the consumer, and the precarious cheque, cash or bank transfer. Project or an outcome of Myth 1 or Myth 2, not re- retainer, but no product involved at all. trust we are working hard to rebuild ality. Let me repeat, the time, cost and after the crimes of Equitable Life, Key- Sorry, but again no. Clearly, many firms effort required for research post RDR is data, Shepherds, Arch Cru, Bancassur- and clients do and will want to work on not significantly – if anything – differ- ance sales et all, will be destroyed, and a pure fee basis. ent from what we do now. we will all lose. Again. But in the UK most firms actually use So at best, some marginal cost savings. an Adviser Charging structure, with an Will these be passed on to consumers, agreed amount being deducted from or will this be retained as increased the Product / Platform, at agreed times. profit? Will it be ‘I can do this work for Some say ‘What’s the difference be- £50 less’ or ‘I’ve chosen to be Restricted tween this and commission?’ to make my business as profitable as possible’? If so, then let’s admit it. It is a At one level, not much. At another commercial world out there. level, a lot. No ‘Entitlement’ to the money. No ‘extra ‘Marketing allow- But much of the noise on the Blogs is ances’. No product bias. No ‘112%’ about how the FSA has changed the allocation rates, no funny money, and rules so much (they haven’t) so that you no Providers setting the tariff – what’s have to know every product (you don’t) not to like? so we all have to be Restricted (not true) and that will allow us to make more Myth 4 - Restricted Advice is money (Is this really the core issue here, cheaper than Independent Ad- I wonder?) vice One thought. We are already seeing the start of a possible tendency for How? I can see a case for a reduction in Phil Billingham PI. Ours costs us about 1% of turnover, highly skilled and qualified staff to only so if there is supposed 10% reduction want to work for Independent Firms. ACII Chartered Financial Planner CFP That could add an interesting twist to in premium – and it may be much less – Phil is Director of both Perceptive Plan- the cost saving argument? that only saves 0.1% of our turnover. So, ning, and the Phil Billingham Partnership, in our case, that is about £20 or so per Can we also look at the effect on con- a consultancy specialising in the transi- month. I could probably shop around sumers? It has emerged in the last few tion of Financial Advisory firms from the and save that in stamps and paper! weeks in the UK that the cost of Life ‘Old Model’ to the ‘New Model’

______TRUSTING N°7 – January/June 2015 67 INVESTING / Best Sectors and Trends

Lessons from the Swiss Franc crisis of 15 January!

I was at a meeting at the CIFA/United much has been lost by financial institu- Nations Economic and Social Council tions, central banks, sovereign wealth (ECOSOC) in Geneva on 15 January, funds, etc. when the chair of the meeting — Jean- Pierre Diserens, Secretary-General of CIFA (www.cifango.org) — abruptly an- Investors focus on the wrong nounced that the Swiss National Bank thing? had just terminated the Swiss Franc’s peg to the Euro. Once again, perhaps the real lesson is that most people focus on the wrong This surprise announcement must have thing in investing. been “very significant” for the chair of the meeting to interrupt the meeting’s They focus on the returns, when they proceedings. should be focusing on the risk! To try to understand the catastrophic Whenever you invest in anything, you impact: if you were long on the Euro must ask what is the worse that can against the Swiss Franc on a leverage happen? Also, you have to ask wheth- A possible approach to risk? er you may have any further liabilities of 20 times, the loss would have been So, what is a simple moderate solution even after you have lost all your money five times your margin deposit, as at its to investing? Use a diversified portfolio in your account, like in the Swiss Franc/ worse point. The Euro fell by as much of different asset classes globally, such Euro cited in the example above. as 25 per cent on that day. as equities, bonds, commodities and If you are leveraged 100 times, which One should also be aware that a “stop properties, using an investment vehicle I understand is the maximum allowed loss” may be useless under volatile mar- that in effect have the funds actually in Europe or 50 times in USA, you may ket conditions. held in trust by a third party custodian have lost as much as 25 times your If you buy a stock, the company can go – like mutual funds, ETFs, etc. money! bust. If you buy a property, it could The hamburger I ate in Geneva on that be destroyed in a natural disaster that No such thing as a free lunch? day in the morning was 1.135 Singa- may not be covered by insurance. If pore dollars to one Swiss Franc. The you buy a synthetic Exchange Traded Finally, since I keep focusing on risk, next day, the same burger became Fund (ETF), the counter parties may what about so many investors who bor- 1.165 on the credit card machine. fail to fulfill their obligations in a severe rowed in Swiss Francs to invest in all market crash. If you invest in a unreg- kinds of investments, because of the ulated alternative investment like low interest rate? The fallout may never be fully wine, art, eco-housing, etc., your only Well, that is another article for another known? recourse may be against a company day ...and, by the way, the Swiss Franc that has “run away”. now pays a negative interest rate. Subsequently, the news in the following days revealed the collapse of two Inflation risk? international forex brokers and some Also, not forgetting that perhaps an of- Leong Sze Hian hedge funds. The fallout may only be ten overlooked risk is that bank depos- Past President known much later, particularly the con- its below the inflation rate are actually Society of Financial Service Professionals sequences of counter parties, as to how losing money all the time. Singapore

______68 TRUSTING N°7 – January/June 2015 Best Sectors and Trends / INVESTING

Azimut Group, Story of Success

Azimut is Italy’s leading independent Within Azimut, “growth” is achieved Foreign expansion has enhanced prod- asset manager, active since twenty-five through an international expansion uct innovation, a strategic component years (1990) and totally independent aiming at exporting, via local partner- of the Azimut Group allowing existing from banking, insurance or industrial ships, its business model integrating and prospect clients to access asset groups. The Group comprises various production and distribution. Today, classes normally reserved to institu- companies active in sales, manage- Azimut operates in 13 countries with tional investors. It’s a tangible sign of ment and distribution of financial and the highest growth rate. Its fund man- the multinational dimension that Azi- insurance products, with Registered Of- agers, following international markets mut is cautiously and persistently pur- fices in Italy, Luxembourg, Ireland, Chi- in real time and on a 24 hours basis, suing. Azimut launched very innova- na (Hong Kong and Shanghai), Monaco, are organized in three distinct geogra- tive products: Renminbi Opportunities Switzerland, Taiwan, Brazil, Singapore, phies. The first one “Europe, Africa and (the first European fund allowing to seize Mexico, Australia and Turkey. Azimut is the Middle East” is followed by fund the growth opportunities of the Chinese cur- a modern Group. The Parent Company managers located in Italy, Luxembourg, rency), Cat Bond Fund (one among the few Azimut Holding was listed on the Ital- Switzerland, Ireland and Turkey. The UCITS product investing in Insurance Linked ian stock exchange on 7 July 2004 and second one “the Americas with par- Securities, providing exposure to insurance it is a member of the main Italian index ticular emphasis on Central and South risks related to catastrophic events), Hybrid FTSE MIB since March 2010 (Azimut America” is based on joint ventures in Bonds (investing in hybrid instruments), Lira was the best performing stock of 2012), Brazil. The third one “Asia and Australia” Plus (Turkish Lira), Global Sukuk (investing in where it currently ranks among the top is managed by Azimut fund managers “Sukuk” bonds respecting the principles of the 35 Italian companies by capitalization. located in its Hong Kong and Shanghai Muslim religion), and AZ real Plus (investing In September 2013, it joined the EuroS- offices, as well as with partnerships es- mainly in Brazilian government bonds and toxx 600 index. tablished in Singapore. short-term domestic monetary instruments). In Italy, Azimut has about 190,000 clients assisted by over 1,500 financial partners (through a distribution network - Azimut Consulenza SIM - and its divisions: AZ Investmenti, Apogeo Consulting, Azimut Wealth Management, Azimut Global Advi- sory, Azimut Kalybra and Institutional & business partners), with over 30 billion euro in total assets, of which 27.5 billion are under management (as of January 2015). Azimut is a dynamic Group of portfolio managers and financial partners, all operating in a cohesive manner. Over a thousand managers, employees and financial advisors have been directly involved in the Azimut Holding shareholder structure since the IPO, a strategy guaranteeing stability and performance and representing a rare example of commitment and independence.

______TRUSTING N°7 – January/June 2015 69 INVESTING / Experts’ Views

New Research Findings on pension savings returns

The outlook for European citizens sav- by 40 % over the last 13 years, destroying money for their pensions is far from ing 19% of the real value of the partici- encouraging. Although lower inflation pants’ savings. rates across the EU slightly improved The BETTER FINANCE report con- real returns, current low interest rates firms and significantly expands upon (lower still following the latest ECB cut the 2012 findings of the OECD which down to 0,05%) combined with heavy revealed negative real returns for pen- fees, render pension savings mar- sion funds. Unlike the OECD report, kets extremely vulnerable to even the however, it also covers personal pen- slightest increase in inflation. sion products and takes into account all Worryingly the actual performance of charges, fees and commissions borne pension savings remains unknown to by pension savers as well as the impact clients and to regulators. It comes as of taxation in order to reveal exactly no surprise then that the latest EU Con- what actually ends up ‘in the pockets’ sumer Markets Scorecard again ranks of pension savers. pensions and investments as the worst consumer markets of all. With no clear information regarding their performance, a lack of compre- A report by BETTER FINANCE on the hensive and harmonised disclosures for gloomy status of private pensions in long term and pension products com- Europe — the 2014 Edition of «Pen- bined with biased advice at the point of sion Savings: The Real Return» — sale, it is nearly impossible to work out now covers 8 EU countries (Belgium, how best to save for retirement. Currently European citizens looking to Denmark, France, Germany, Italy, Poland, invest in long-term and pension saving Spain and the United Kingdom), repre- Whereas the European Authorities retail products will find it nearly impos- senting 75% of the entire EU popula- rightly identified the promotion of sible to find adequate and comparable tion. long term investment as a priority for growth and jobs, their current policies information to help them decide on how The report clearly illustrates that the with regard to long term and pension to optimise returns on their savings. tendency to blame poor returns on the savings to this day remain inconsistent For this reason BETTER FINANCE also performance of capital markets holds with this priority. calls for the EU proposed Regulation no water. Pension funds too often un- for a Key Information Document to be derperform capital markets. As stated extended to all long-term and pension by the European Commission in 2013, EU Savers Call for a pan-Euro- investment products and for this to be some of the “reasons for not saving complemented by the disclosure of full long-term are the often poor perfor- pean Personal Pension Plan costs and commissions, as well as long mance of financial intermediaries to BETTER FINANCE now calls for a sim- term historical returns (after inflation, deliver reasonable return, and costs ple, transparent pan-European savings charges and taxes). of intermediation”. A case in point is a Belgian pension fund, which bench- vehicle that at least protects the long- Besides improving information stan- marks itself against world equities and term purchasing power of savings. The dards at the point of sale, it would con- bonds, and persistently lagged the proposal is part of ten key policy mea- stitute an important step in the right performance of such capital markets sures listed in the report (see below). direction if the responsible institutions

______70 TRUSTING N°7 – January/June 2015 Experts’ Views / INVESTING

were to actually report on pension 2. For EIOPA to comply with ESAs prove the governance of the collec- saver trends, including on the actual Regulations article 9(1): to actually tive scheme by having at least half performance of all pension products. report on pension saver trends, in- of the scheme’s supervisory body Currently no such data exists. cluding on the actual performance directly designated by the pension of all pension products - one can Having identified households as the scheme participants. manage or supervise only what one main source of funds to finance -in 7. Ensure the end of biased advice can measure. It is indeed quite sur- vestment, decision makers in the EU at the point of sale and guarantee prising that the actual net perfor- also blame the poor performance by competent advice on long term in- mance of pension saving products financial intermediaries in delivering vestments, including going back to is not really known, nor by clients reasonable returns for said households. basics in order to explain what the nor by supervisors. European authorities, however, are not building blocks of LT saving prod- without blame either. At the very least 3. Design a simple retirement savings ucts are: equities and bonds. vehicle that protects the long-term an end should be put to the penaliza- 8. Ensure special treatment by pru- purchasing power of savings (could tion of savers. Taxation policies should dential regulation of all pension be used as a default option in other be put in place to incentivize long term products (insurance and non-insur- pension saving products): retirement savings and investment over ance regulated): the long duration of consumption and short term savings. • readily accessible, without need for the liabilities allow for higher port- advice and its associated commis- folio allocation to long term invest- sions; ments such as equities. Recommendations • supervised by public bodies. 9. Taxation to incentivize long term Based on the BETTER FINANCE re- A pan-European Personal Pension retirement savings and investment search findings, we recommend the Plan would definitely be welcomed over consumption and short term following ten policy measures to ur- by EU savers if it matches these re- savings, or at least not penalise this gently address this issue of inadequate quirements and if it is not disadvan- virtuous behaviour. pension savings returns: taged in terms of taxation. 10.Basic financial mathematics to be 1. Improve and harmonize disclo- 4. Simplify and standardize the range part of school curricula, as this is a sures for all long term and retire- of product offerings; forbid non crucial tool in selecting suitable in- ment savings products; UCITs funds (“AIFs” ) in all retail pack- vestment products for pension sav- • “PRIIPs”: the EU proposed Regulation aged long-term and pension prod- ers. for a Key Information Document (KID) ucts (except for qualified investors must be extended to all retail long- who can access packaged products term and pension investment prod- with choice of investment units), and ucts, or, at least, a summary of pension find ways to thoroughly streamline saving product information should be the excessive number of UCITs of- required and be as comparable as pos- fered in the EU (about 35,000 versus sible to this KID; 9,000 in the US, and that for a smaller • Disclosure of full costs and commis- market). sions, and long term historical returns must be provided: 5. Establish transparent, competitive and easy-to-use (standardised) re- - After inflation; tail annuities markets throughout - After all charges borne directly or indi- the EU, and give more freedom to rectly by the investor; and pension savers to choose between Guillaume Prache - After taxes (as required in the US for in- annuities and withdrawals when Managing Director vestment funds). and after they reach retirement BETTER FINANCE for all • Disclosure of funding status (assets/li- age. The European federation abilities coverage) 6. For those individually subscribed • Disclosure of transfer/exit possibilities to collective pension products, im- of Financial Services Users

______TRUSTING N°7 – January/June 2015 71 INVESTING / Experts’ Views

The history of Australian superannuation

Compulsory super has been good economic policy for Australia and SMSFs have played a vital leading role in it.

Superannuation has a long history in SG savings, and voluntary savings – and Australia, dating back to the late 1800s. despite significant changes to the sys- But for nearly 200 years, until the 1980s, tem since 1992, the fundamental prin- it was largely the preserve of company ciples remain: a universal, compulsory executives, small businesses and public system paid for by employer contribu- servants. tions – the current SG rate is 9.5% with It was not until 1986, when the Austra- the goal to reach 12% on 1 July 2025 – lian Council of Trade Unions, Australia’s that receives tax concessions to encour- Andrea Slattery peak union body, won a 3% employer age people to be self-sufficient in retire- Managing Director/CEO ment. superannuation contribution as part SMSF Association of the national wage case did superan- Despite some policy differences about www.smsfassociation.com nuation begin to spread to the broader superannuation between the two major Andrea is the Managing Director/CEO and working population. By 1989, superan- political parties, the system largely en- Founder of the SMSF Association. She has nuation coverage had increased rapidly joys bipartisan political support, which worked in the Australian Financial Services to cover 79% of all employees. they both recommitted to in 2013. industry for over 22 years and has established herself as an authority in the field of Self- But the then Labor Government did not To operate its superannuation system, Managed Super Funds (SMSF) and Retire- want to leave superannuation for em- Australia opted for the trustee system. ment systems. Andrea was awarded ‘2014 ployers and unions to contest as part Trustees are responsible for the over- Woman of the Year’ – Money Management | of national wage cases; Labor wanted sight of the funds, including the obliga- Super Review, Australian Women in Financial universal coverage for all employees tion to ensure funds are invested pru- Services Awards. She won the “2014 Invisible Government’ award as a trusted Australian underpinned by legislation. On 1 July dently. Their obligations are set out in spokesperson by Media and was named on the 1992, the Superannuation Guarantee the Superannuation Industry (Supervi- ‘Roll of Honour for the Australian Superan- (SG), fully paid by employers, was intro- sion) Act 1993, as well as being subject nuation Industry’ by Asia Asset in 2010. duced at 3% of salary, gradually increas- to general trust law. She holds a Masters in Commerce from the ing to 9% by 2003. University of South Australia, and designa- Today, there are more than 540,000 tions including SMSF Specialist Advisor, a The Government saw the SG as part of superannuation funds in operation in Fellow of the Australian institute of Company its “three pillars” approach to retirement Australia with funds under manage- Directors, a CPA and CPA Financial Planning Specialist. income – the Government age pension, ment (FUM) now about $1.85 trillion.

______72 TRUSTING N°7 – January/June 2015 Experts’ Views / INVESTING

The funds are growing exponentially system as the second best in the world by 27.8% from 421,956 to 539,375. with Deloitte Actuaries and Consultants behind Denmark. The bulk of SMSF trustees are aged 50 estimating FUM will be $7.6 trillion by From the perspective of the organi- and over, reflecting a trend for people 2033. sation that I represent, the SMSF As- to want to take direct control of their There are various types of funds, with sociation, the growth of our sector of superannuation as they either near or the main categories being: the market, in terms of the number in retirement. The Global Financial Cri- of funds, trustees and FUM, has been sis simply reinforced this trend. • Industry Funds: run by employer as- nothing short of staggering. The num- sociations and/or unions for employ- But although they take direct control, bers bear this out. ees (20%); nearly 99%, according to the latest re- Figures by the Australian Taxation Of- search by the SMSF Association and • Retail Funds: run by financial institu- fice (ATO) show that in the four years Russell investments, still need profes- tions for individuals (27%); to 30 September 2014, the SMSF sector sional guidance. What is emerging in • Employer Funds: run by employers grew by $180 billion or 49%. In dollar Australia is the ‘SMSF Specialist’ - the solely for their employees (4%); terms, it was the fastest growing super- professional/s who advise these trust- annuation sector and it means SMSFs ees on all/some aspects of their SMSF. • Public Sector Funds: run by govern- hold about 30% of superannuation The SMSF Association’s role is to ensure ments for their employees (16%); FUM. By contrast, at 30 June 2002, that all professionals offer the highest qual- • Self Managed Superannuation Funds percentage was a paltry 11% of $350 ity advice and service, that the trustee (SMSFs): run by a small number of in- billion. is able to make informed decisions and that the integrity of the industry is para- dividuals (maximum number allowed On the investment front, and over the mount. is four). Fund trustees are fund mem- same four-year period to 30 September bers (31%). 2014, SMSF trustees have not only kept The SMSF Association’s research indi- The first four types of fund are regulat- pace with the other funds in terms of cates that with the increasing numbers ed by the Australian Prudential Regu- returns but have been acknowledged of professionals providing specialised lation Authority (APRA); SMSFs come by the Regulator to be better perform- services and advice to trustees in com- under the regulatory domain of the ing over the long term. bination with consumers becoming Australian Taxation Office (ATO). more engaged and informed about In terms of the number of trustees, ATO their retirement savings and spending, As I said, there is broad consensus in figures reveal they have grown 26.6% then the number of SMSF funds will Australia that compulsory superannua- in the four years to 30 September 2014, continue to grow substantially. tion is the correct policy setting with from 804,000 to now top the one mil- the latest Melbourne Mercer Global lion mark at 1,023,964. Over the same Pension Index rating the Australian period, the number of SMSFs has grown Andrea Slattery

The SMSF Association is the authoritative voice for the self-managed It represents professionals providing a range of services across vari- superannuation fund (SMSF) sector in Australia that is regulated by ous disciplines in the complex area of SMSFs. It is the advocate for the the Australian Taxation Office. There are now more than 540,000 highest professional standards and competence to ensure SMSF trust- SMSFs with one million trustees/members. FUM are about $600 bil- ees always receive the best possible advice and it supports the engage- lion or about one-third of the total superannuation pool of $1.85 tril- ment of trustees and consumers in making informed decisions for their lion. The SMSF Association is the leader of the SMSF sector’s integrity. future retirement and for Australians future savings system.

______TRUSTING N°7 – January/June 2015 73 INVESTING / Global Economy and Central Banks

On PIKETTY’s misunderstanding of “CAPITAL”

Several months ago French economist Babylon, and in the China of Qin Shi Thomas Piketty updated to great ac- Huang. In all of these, there was not claim Karl Marx’s moral critique of pri- only wealth but also inequalities of vate wealth accumulation. The ethical wealth and income. issue put by both writers before the Capitalism, properly defined and un- leaders of modern civilization is in- derstood, is not merely “wealthism”, equality – differences in social power but a special way to create new wealth between the rich and the poor. They through self-sustaining economic complain that modern economies sys- growth. It is a separately distinguish- tematically and consistently favor the able system within the field of human rich over the poor in the allocation of economic practices designed to secure income and the ownership of assets. material well-being. Henry Sidgwick Since the publication of Marx’s Das made this point in his 1883 treatise Capital in 1867, this critique has gen- Principles of Political Economy. Stephen B. Young erally been understood – mistakenly, Global Executive Director I believe - as narrowly focused on the CAUX ROUND TABLE capitalist system of production. www.cauxroundtable.org To be sure, Marx objected with passion Stephen B. Young became the Global Execu- and vitriol to the economic system in tive Director of the Caux Round Table in which he lived, which was early indus- 2000. He wrote the book Moral Capitalism trial capitalism, and drew attention to to explicate the economic and moral approach of the Caux Round Table to free market all its ethical shortcomings. Piketty, capitalism. Moral Capitalism integrated the too, presents a critique of today’s glob- moral sense theory of Adam Smith with other al economic practices. So it is fair to theories of moral philosophy and economics. conclude that both writers object to There are other ways distinct from cap- It has been translated into Japanese, Span- ish, Croat and Polish. In 2008, Young was capitalism as an economic system. italism through which humanity has sought to meet its material needs and named one of the 23 persons who developed But their critique applies to more than the corporate social responsibility move- to fulfill its diverse wants, both tangible ment by Professor Sandra Waddock in her just capitalism. They indict wealth in and intangible. There have been hunt- book, The Difference Makers. For the Caux general. er/gatherers. There were collaborative Round Table, Young drafted a set of ethical Principles for Government, edited a set of Wealth has been a universal expres- farming practices. There is total state ownership as in Pol Pot’s Cambodia and ethical Principles for NGOs, and wrote a set sion of humanity’s needs and wants as of ethical Principles for the Ownership of to which the “memory of man runneth Kim Jong-un’s North Korea. There were Wealth. To support training in the Principles not to the contrary.” feudal aristocracies. There have been for Government, Young wrote the monograph landlords and latifundia. There were Moral Government which was translated St Paul’s famous conclusion that “the guilds for artisans. There is mercantil- into Spanish. Under Young’s stewardship, love of money is the root of all evil” was writ- ism. There is crony-capitalism. the Caux Round Table developed country ten down in a pre-capitalist society. chapters, developed a unique management But in all these systems there is wealth tool for corporate social responsibility, the Wealth has been with us for a long along with inequality in its distribution Arcturus assessment instrument, and an assessment instrument to help individuals act more time; in Pharaonic Egypt, in Mayan among people. There even was un- ethically, the Ethical Leadership Profile. city-states, in the Hanging Gardens of equal distribution of goods among the

______74 TRUSTING N°7 – January/June 2015 Global Economy and Central Banks / INVESTING

capital as “technology” (p. 212); or again as a “factor of production”. (p.213) He dis- tinguishes between nominal assets and real assets. (p.210) He considers the assets to be counted as domestic capital as both the means of production – land and machines, patents, etc. – and financial instruments such as stock with a market value. (p.119) He comments: “It is always difficult to “Piketty says he took a seminal trip to Romania in 1990 at age 18. “This sort of vaccinated me for life against lazy, set a price on capital, in part because anti-capitalist rhetoric because when you see these empty it is objectively complex to foresee the shops, you see these people queuing for nothing in the future demand for goods and services street,” he told the New York Times. “It became clear to generated by a firm or by real estate and me that we need private property and market institutions, therefore to predict the future flows of not just for economic efficiency but for personal freedom.” profits, dividends, royalties, rents and so on that the assets in question will yield.” graves of ancient peoples. Inequality is ties, profits, capital gains, etc.” (p.242) In (p. 171) Here he mixes together financial some universal function of the human other words, in his definition of capital assets of all sorts with the wealth that is enterprise, not just a sin of capitalism he makes no necessary connection to focused narrowly on firms, which pro- alone. its making investments only in produce goods and services. ductive enterprise. For Piketty, capital Unfortunately in derogation of clear “Yet what could be more natural to ask thinking, the word “capital” is used to is wealth that can be used anywhere to earn a return. One such example of a capital asset than it produce a reli- indicate both wealth in general and the able and steady income: that is in fact special forms of usage, which consti- is where he speaks of “a capital which produced an annual rent”. (p.207) the goal of a “perfect” capital market as tutes capitalism as a dynamic system of economists define it.” (p.114) production and distribution. He defines private capital as the differ- “The advantage of owning things is Piketty, for example, uses the word ence between the assets and liabilities of private individuals: “whether public that one can continue to consume and “capital” in this way, which conflates accumulate without having to work, or economic apples and oranges. or private, capital is always defined as net wealth, that is the difference be- at any rate continue to consume and His research is to study the ratio of in- tween the market value of what one accumulate more than one could pro- come derived from labor to that de- owns (assets) and what one owes (li- duce on one’s own.” (p.121) This is a clas- rived from non-labor. He divides na- abilities, or debts.)” (p.123) sic definition of living off rents rather tional income into only two categories: than wages. Thus he believes that labor and capital. He lumps together In speaking of the “nature of wealth” he “Capital is never quiet: it is always risk- all forms of income which do not arise refers to “capital” as industrial and finan- oriented and entrepreneurial, at least from work and calls the aggregate of cial capital and urban real estate.” (p.164). at its inception, yet it always tends to these forms of income the income from He defines wealth as “land, buildings, transform itself into rents as it accumu- “capital”. These forms of income from machinery, firms, stocks, bonds, - pat lates in large enough amounts – that is capital are: “rent, dividends, interest, ents, livestock, gold, natural resources, its vocation it logical destination.” (p.116) profits, capital gains, royalties, and oth- etc.” (p.113) In short he uses the term “capital” as synonymous with wealth. Piketty does not include human capital er income derived from the mere fact of – the present net value of future earn- owning capital in the form of land, real He then does not subdivide capital into ings of a person – as part of the capital estate, financial instruments, industrial categories of analysis depending on he seeks to measure. Thus, in a post- equipment, etc., again regardless of its how it is used. Is it, for example, trans- industrial economic order he distorts precise legal classification.” (p.18) formed into productive assets or only the relative weights of income from He speaks of capital as earning income invested in status goods or just kept labor and from capital. Many who fall from “rents, dividends, interest, royal- as ready money? But he does speak of into his category of only earning wages

______TRUSTING N°7 – January/June 2015 75 INVESTING / Global Economy and Central Banks

From the Economist, Nov 8th, What happened in the mid-80’s to make it so hard for the bottom 90% to accumulate wealth?

are actually capital assets due to their of inequalities over time of income and constitutes for Marx “value”. Marx does skills and education and management wealth? admit that there can be ownable items capabilities. Their income should be Piketty rather simply follows Karl Marx which have use-value but no “value” in counted as income from capital. While in this definition of “capital” as wealth his eyes because their utility to owners this adds to the amount of capital in that can be easily monetized. is not due to use of labor. (p.47) Use-val- society, it broadens the base of those ues arise from social convention; value who should be considered as owners First Marx posits that “the wealth of comes from the material contribution of wealth producing assets. those societies in which the capitalist of abstract human labor used to pro- mode of production prevails presents However Piketty feels that “Attributing duce a commodity. itself as “an immense accumulation of a monetary value to the stock of hu- commodities.” (Das Capital p.41) Thus Then, commodities also have an ex- man capital makes sense only in so- Marx does not focus on the dynamic of change value by which one is exchanged cieties where it is actually possible to capitalism – investment in the division for others. The exchange value to be own other individuals fully and entirely of labor and self-perpetuating increas- received for a commodity is a rent pay- – societies that at first sight have defini- es in productivity which lower costs to ment. (p.95) Commodities only realize tively ceased to exist.” (p.163) Piketty thus society and increase the supply of avail- their exchange value when their owners posits as capital only assets that earn able goods and services. bring them forward for sale. (p. 96) rents and can be priced and sold in a market to others who want to acquire Then he posits what he calls “use-value” For Marx, the circulation of commodi- the right to those future rents. or the utility of a thing to its owners. ties with their associated values is the “Use-values” constitute the substance starting point of capital. (p.163) Money Inconsistently, Piketty considers that of all wealth. (p.43) is used to broker the exchange of com- “knowledge and skill diffusion is the modities. Commodities can thus be re- Then Marx moves on to a third con- key to overall productivity growth as placed by money in the pocket. Money cept – “human labor in the abstract well as the reduction of inequality both thus becomes the first form in which can be allocated in units of different within and between countries.” (p.21) If capital appears. (p.163) this is so, why then not consider hu- magnitudes to commodities”. (p. 45, man capital germane to any analysis 46) The amount of this abstract labor Thus for Karl Marx, capital is not spe-

______76 TRUSTING N°7 – January/June 2015 Global Economy and Central Banks / INVESTING

cially connected to capitalism; it is ge- is a rational miser. The never-ending aug- neric to the circulation of money, or to mentation of exchange-value, which the wealth in general. miser strives after by seeking to save his money from circulation, is attained by the Capital for Marx “appears first as mon- more acute capitalist by constantly throw- eyed wealth, as the capital of the mer- ing it afresh into circulation.” (p.170, 171) chant and of the usurer.” (p.163) “All new capital, to commence with, comes on Marx even conflates the unique aspect the stage, that is, on the market, wheth- of true capitalism into money only by er of commodities, labor or money … saying that “… industrial capital too is in the shape of money that by a definite money, that is changed into commodi- process has to be transformed into cap- ties, and by the sale of these commodi- ital.” (p.164) Money that becomes capital ties, is reconverted into money.” (p.173) is money that is laid out to make more Marx puts as a foundational dynamic money. When money is laid out and of capitalism the extraction of money brings back an increase in money, the through base practices, oppression, increase is “surplus value”. (p. 168) commercial wars, and the evils of early “… the possessor of money becomes a colonialism – the African slave trade, capitalist. His person, or rather, his pocket, child slavery in the mills of England, is the point from which the money starts protection of domestic production, and to which it returns. … as the appro- monopoly charters to companies, au- priation of ever more and more wealth in thorization of banks to discount bills the abstract becomes the sole motive of his and issue their own notes, etc. Marx’s a century ago. The poorest half of the operations, that he functions as a capitalist, theory of economics thus passes far population still owns nothing, but there that is, as capital personified and endowed beyond the confines of capitalism and is now a patrimonial middle class that with consciousness and a will. … The rest- embraces all use of money and so of less, never-ending process of profit-making owns between a quarter and a third of wealth. Central to his ethical calculus alone is what he aims at. This boundless total wealth and the wealthiest 10 per- greed after riches, the passionate chase af- are rent seeking and financial interme- cent now own only two-thirds of what ter exchange-value is common to the capi- diation. there is to own rather than nine-tenths.” talist and the miser; but while the miser is Marx seems to have missed what is (p.377) merely a capitalist gone mad, the capitalist special about capitalism, which is not “Make no mistake: the growth of a true its use of wealth, or private property, or “patrimonial (or propertied) middle class” market transactions, or prices, but rath- was the principal structural transforma- er its capacity for enhancing productive tion of the distribution of wealth in the capacity. Unlike all the other modalities developed countries in the twentieth of economic endeavor, only capitalism century.” (p.260) “…the rise of a prop- can sustainably increase economic out- ertied middle class was accompanied come and raise living standards. by a very sharp decrease in the wealth Thus, the ethical issue of inequality share of the upper centile, which fell by has to be thought about differently in more than half, going from more than capitalist systems than in non-capitalist 50 percent in Europe at the turn of the economies. With economic growth in twentieth century to around 20-25 per- true capitalism comes the opportunity cent at the end of that century and the to reduce inequalities, or at least, to im- beginning of the next.” (p. 262) prove the lives of those living at every “As noted, the very significant decon- level of distribution. centration of wealth (which has seen Piketty admits as much: “concentra- the top centile’s share decrease by nearly tion of wealth remains high, although two-thirds in a century from 60 percent it is noticeable less extreme than it was in 1910-1920 to just over 20 percent

______TRUSTING N°7 – January/June 2015 77 INVESTING / Global Economy and Central Banks

lowing people around the world to eat better, dress better, travel, learn, obtain medical care and so on.” (p.89) In fact, recently, the percentage of people living in extreme poverty has fallen from 36% of humanity in 1990 to 15% in 2011. Those who earn under US$1.25 a day has fallen from 811 million persons in 1991 to 375 million in 2013. Both statistics were reported by the World Bank on October 9, 2014. Piketty worries about low growth, which can be overcome through the application of capitalism. “Capital-dominated societies … can arise and subsist only in low-growth regimes.” (p.84) The relative ratio of earning income from wealth vis-à-vis earning income from labor has grown in favor of wealth, and Piketty predicts will stay high or get higher in favor of wealth in the coming years of the 21st century, because of slower growth – especially population growth – and high- today) and the emergence of a patri- end its total amount relative to income er savings. (p.173) “a country that saves a monial middle class imply that there scarcely changed at all.” (p.140) With the lot and grows slowly will over the long are far fewer very large estates today achievements of capitalism in lowering run accumulate an enormous stock of than there were in the nineteenth costs and providing new technologies capital (relative to its income) which century.”(p.418) – cotton clothing, electricity, flush toi- can in turn have a significant effect on The total amount of wealth and inheri- lets and running hot water, automo- tances in France is about the same mag- biles, radios and cell phones – the lives nitude to GDP in both periods, but with of poor people in both countries were a century of economic growth, that objectively much better off by the end wealth was spread among many more of the 20th century than they had been families. He speculates that as a result in the 1750s. of growth “there will probably be more Piketty admits that because of growth small to medium rentiers and fewer ex- due to capitalism “today’s societies are tremely wealthy rentiers”. (p. 378) “… we very different from the societies of the have gone from a society of rentiers to past, when growth was close to zero a society of managers.” (p. 278) or barely 0.1 % per year, as in the 18th Piketty arranges his assumptions to century.” (p.96) A consumer basket ini- overlook the dramatic contribution tially filled mainly with foodstuffs (in to human well-being of capitalism as the 18th century) gradually gave way a special sub-system of economic ac- to a much more diversified basket of tivity. He concludes, for example that goods, rich in manufactured products from the 18th to the 21st century “the and services.” (p.87) “material conditions nature of capital” in Britain and France of life have clearly improved dramati- was totally transformed but “in the cally since the Industrial Revolution, al- A watch for $1.2 million?

______78 TRUSTING N°7 – January/June 2015 Global Economy and Central Banks / INVESTING

the social structure and the distribu- house. No work was needed to earn tion of wealth.” (p.166) “The basic point rental income. is that small variations in the rate of Marx and Piketty find income from work growth can have very large effects on ethically just and admirable. In fact, the capital/income ratio over the long Marx based his entire critique of the run.” (p.167) industrial economy on the assumption Inequality of wealth varies with growth that it diverted too much of the value rate: with low growth, savings by those created by work away from the workers with money will lead to higher levels of to those who had not so contributed to capital in society; with higher growth, the good or service sold. This was the the ratio of wealth to income from la- Marxist theory of surplus value, which bor will be lower. (p. 233, 228) was taken out of flow of buying and selling by “capitalists”. Over 30 years, “a growth rate of 1.5% “Every increase or dimunition of capital, per year corresponds to cumulative Smith’s genius was to realize that in his therefore, naturally tends to increase or growth of more than 35%. In practice, time a new system of production was diminish the real quantity of industry, this implies major changes in lifestyle underway, something new in human the number of productive hands, and and employment.” (p. 95) history. This was the adoption of ma- consequently… the real wealth and PIketty notes that whenever the rate chines and technology along with man- revenue of all … inhabitants.” (Wealth of return on wealth is significantly and agement skills to production to permit of Nations, p.312) the specialization of function and the durably higher than the growth rate of “Increasing the fund which is destined division of labor. It was, he argued, only the economy, it is all but inevitable that for the maintenance of productive the division of labor, which created in- wealth will concentrate and inequality hands tends to increase the number of creased productivity per worker and so increases. (p.377) Thus, a high growth those hands whose labor adds to the more production for the economy, giv- rate lowers the rise of inequality. value of the subject upon which it is been the size of the work force. Thus the stowed.” (p.321) Without capitalism, there is limited division of labor created the ”wealth of growth, much stagnation in produc- nations”. “The annual produce of the land and labor tivity, and even stasis in overall gross of any nation can be increased in its value product. It is under such systems that inequalities of income and wealth are most pernicious and least subject to remediation.

Rent Seeking is not Capitalism What Marx, followed by Piketty, most objected to was rent, not capitalism per se. They both actually wrongly indict- ed capitalism for promoting rents and so allowing the wealthy to live off rents and grow richer in their wealth to earn even more rents in the future. Going back to Adam Smith, income from rent was distinguished from income from labor. Work received a wage. Rents were cash payments for the use of an asset such as land or a Tolkien’s Smaug on his mountain of gold

______TRUSTING N°7 – January/June 2015 79 INVESTING / Global Economy and Central Banks

by no other means but by increasing either sessing wealth to spend it on “conspic- The challenge since then for global the number of its productive laborers or the uous consumption”. Such notorious development efforts, in which trillions productive powers of those laborers who consumption sought, Veblen thought, have been spent by wealthy nations have before been employed. Productivity to secure social status, not to finance and international bodies such as the can never be increased but in consequence directly more capitalist production. World Bank, has been to move societies of an increase in capital or of the funds He thus questioned the social utility of out of stagnation into robust platforms destined for maintaining workers and/or that usage of wealth. for production of goods and services in consequence of either some addition which provide for rising living stan- Smith rejected the view that money and improvement to those machines and dards and a middle class which, in turn, was productive capital: the opulence of instruments which facilitate and abridge incubates constructive political reform a nation did not depend on its coin and labor or of a more proper division and dis- favoring constitutional democracy and money (Lectures, p.388) To accumulate tribution of employment.” (p.326) the honoring of human rights. money was not to accumulate wealth. Growth, therefore, does follow natural- Too much money just inflated prices The objectives of development are en- ly on an increase of money or of wealth and did not cause growth in produc- capsulated in the Millennium Develop- but only on a proper application of tion. ment Goals of 2000 and the proposed money to production. “Every unneces- Sustainable Development Goals to be The emergence of capitalism as some- sary accumulation of wealth can serve adopted by the General Assembly of thing new in human economic activ- no good purpose whatever.” (Lectures the United Nations in September 2015. on Jurisprudence, p. 387) ity was at the center of thinking about “modernization” after World War II as An often-overlooked fact is that capital- Capitalism is, therefore, very different efforts were made to bring the fruits ism, stricto sensu, is a quantum improve- from wealthism. of industrialization to poor countries ment on traditional private property The early American sociologist Thor- around the world. W. W. Rostow in and free market economic systems. stein Veblen made the distinction the his famous book The Stages of Eco- Humanity has enjoyed private property central observation of his book The nomic Growth spoke of the advent of rights and has used free markets since Theory of the Leisure Class. He capitalism in any country as its “take- time immemorial without thereby gen- concluded that a notable feature of the off” into self-sustaining new wealth erating self-sustaining growth in pro- “wealthism” of his day, copious wealth creation. Rostow’s thinking has more ductivity and GDP. The sum of Total produced by industrial capitalism, was recently been expanded by William Factor Production in pre-capitalist and an aristocratic tendency of those pos- Easterly. non-capitalist societies is dramatically lower output than is possible under capitalism. Why? In his anecdote about production of straight pins, Smith reported that under the pre-capitalist artisan mode of manufacture, one person could make but 200 pins a day. But with division of labor in a factory setting, some 10 persons could through accomplishment of 18 different tasks make 48,000 pins a day, for a productivity outcome of 4,800 pins per worker. Consider for a moment the result for inequality of wealth of a drop in the price of pins when supply grows from 200 a day to 48,000 a day. The price of pins will drop dramatically to the advantage of those with less income and wealth. The new factory system brought them

______80 TRUSTING N°7 – January/June 2015 Global Economy and Central Banks / INVESTING

better real standards of living. And firms. The price of buying their capac- poor people in the 18th century had ity to earn income through their busi- greater need for straight pins for their ness activity, their market capitaliza- sewing than did wealthy gentry and tion, reflects the present cash value of aristocratic families. their predictable future earnings. The But how to classify the cash proceeds factors that contribute to those future which would come to the owner of earnings constitute their current “stock” such a pin factory after he had paid for to use Smith’s terminology. Accumu- all his machines, his consumable sup- lating an appropriate “stock” to meet plies, and wages for his employees? market demand is the foundation for Should the returns to enterprise be al- business success. Putting that “stock” located to rent or to wages? into production through the division of labor generates jobs and increased Smith advanced a third solution: such cash flow in the economy. special returns should be given their own, separate, category of earnings Increased liquidity coupled with legal – a return on investment in enter- rights to borrow money against future prise. “Money used as a capital is earnings permits accumulation of more employed in the maintenance of “stock” and so more growth in market product laborers, who reproduce the activity and liquidity. The accumula- value with a profit.” (p.333) Smith was tion and use of “stock” was for Smith clear in his own mind that the return the secret ingredient for success in ex- from investment and management profits from rents.(p.319) panding the wealth of nations. Without was not mere rent, as active decision- “stock,” land and labor combined would Land earned rent; labor earned wages; making and risk-taking was required as not generate new, higher levels of pro- and stock earned increase, or profit. a consequence of setting up an enter- ductive output. prise. Nor was this return a wage from Smith considered that the share of Land and labor could earn income in labor work. The work of the master of wealth which was lent at interest could the form of rents and wages, and so enterprise was not mere hourly labor; also be called a capital but it earned a give rise to wealth, but they could not it was something new and strange. It rent. “As such capitals are lent out and create capitalism. demanded different skills in making paid back in money, there constitute plans and giving instructions and coor- what is called the monied interest. It is Smith then divided wealth into dif- dinating the interdependencies of the distinct not only from the landed, but ferent categories. Wealth devoted to different specialized functions. It also from the trading and the manufactur- enterprise became “a capital” which demanded acquisition of machinery ing interests.” (p.334) financed the acquisition of “stock” for the business. Wealth not turned into and materials to support the workers in Wealth assigned to others to employ “a capital” was merely wealth, which their different assigned tasks. This took is “a capital from which owners wish could be unproductive or even wasted effort and calculation not necessary on to derive a revenue without being at through improvidence. the part of a landlord who just received the trouble of employing them them- income for use of his real property. selves”. (p.335) As the overall wealth of The distinctive aspect of capitalism as Smith thus concocted the famous three society (its stock for Smith) grows, the opposed to “wealthism” is how wealth factors of capitalist production: land, quantity of stock available to be lent at is used. Not every use of wealth a capi- labor and what he called “stock” which interest - and the power of the monied talist does make. we now denominate as “capital”. interest - grows greater and greater. Contemporary Marxists make the dis- A capital as Smith conceived of it was Today, in a post-industrial world, in- tinction I am suggesting here when only used for production – “for main- tangible assets such as human capital, they focus their objections to what they taining productive hands only” (p.316) social capital, reputation, brand equity, call “Fordism” or “Taylorism” to reflect In this way did that portion of a stock and intellectual property constitute a the factory system of division of labor constitute a revenue. He distinguished large share of the earning capacity of on production lines.

______TRUSTING N°7 – January/June 2015 81 INVESTING / Global Economy and Central Banks

Sociologists Max Weber, Thorstein sumption or hoarding money but out- A gambler, a spendthrift, a collector of Veblen in his study of enterprise, and wardly directed towards the accumula- fine art, a merchant who buys and sells later Daniel Bell attempted to define tion of working capacities that produce goods made by others, a landed aris- the special quality of capitalism as an what others will buy. Consumption tocrat, a lawyer or other professional economic dynamic as a way of think- and hoarding tend not towards voca- – none of these were by role and activ- tions but risk the onset of sumptuary ity Smith-style capitalists, though very ing, a mentalite, a gestalt, a culture and a indulgence at some margin of an indi- wealthy they could be. way of life. vidual’s utility preferences. But if they took some of their wealth Weber spoke of capitalism as consisting Bell described the economic principle and used it as “a capital” to invest in di- of profit-making enterprises which are of capitalism as the “rational calculation vision-of-labor reliant enterprise, then systems of action seeking to increase of efficiency and return in the choice of they could be called capitalists. control over goods and services and means in order to increase production Now the analysis of how capitalism (e.g. the most efficient combinations of capable of autonomous orientation to worked became complicated once labor and capital or the specialization of capital accounting, which values and money is introduced into consider- tasks and functions)”. verifies opportunities for profit and of ation. Both wealth in general and that success in activities designed to make Capitalism, accordingly, uses wealth sub-category of wealth Smith called “a profits. Capitalists seek forever-renew- and created new wealth, but it is not capital”, which was funds devoted to ing opportunities for profit via rational mere “wealthism”. employment of others seeking a profit, enterprise. They orient their actions to If “wealthism” is a cancer to society due used money. monetary calculations of an increase to its frivolity in the use of assets and The master of enterprise needed money in the market value of the enterprise. its division of communities into “haves” to acquire land, plant equipment, mate- (Theory of Economic and Social and “have-nots”, then it is a cancer that rials, and to advance wages to employ- Organization) In another work, We- degrades the quality of life in capitalist ees. The money came from his capital, ber asserted that, “the impulse to ac- and non-capitalist societies alike. which was a part of his wealth. quisition, pursuit of gain, of money, of the greatest possible amount of money, has in itself nothing to do with capitalism.” (The Protestant Ethic and The Spirit of Capitalism, p.17) He continued: “This impulse exists and has existed among waiters, physicians, coachmen, artists, prostitutes, dishon- est officials, soldiers, nobles, crusaders, gamblers, and beggars.” Veblen saw the special feature of capitalism as a “machine process” designed as a reasoned procedure grounded on systematic knowledge of natural forces and human aspirations. The mindset of the capitalist, Veblen asserted was to invest in the machine process as owner and designer in order to realize an increase in wealth. The money to be rationally invested in a business enterprise is an amount calculated with reference to the profit-yielding capacity of the enterprise. The orientation of capitalism, then, is not inwardly directed towards con-

______82 TRUSTING N°7 – January/June 2015 Global Economy and Central Banks / INVESTING

and its distribution. Something more is offset by its failures to provide public focused is necessary. What are the re- goods such as health care and educa- sults of the specialized system of divi- tion and its tendency to generate pub- sion of labor and application of “stock” lic bads such as pollution and mindless to production? Are they beneficial? consumerism. Nor did Schumpeter con- What costs come with those benefits? sider the relative advantages brought Just so did Joseph Schumpeter fashion by capitalism to those who provided his theory of capitalism. He focused capital and separately to those who not on wealth but on a process of in- provided only personal labor. With the vention and innovation in technology invention of the corporation, owner- and productive capacities. He put the ship of a capital invested in stock for en- entrepreneur at the center of capital- terprise assumed more and more char- ism, not wealth or money. He coined acteristics of earning income as rent. the phrase “creative destruction” as the Especially when money was lent merely Thus while every person with a capital distinctive feature of capitalism. The for a return of money. The rise of finan- to invest had wealth, not every wealthy system constantly changed the con- cial intermediation to oil the wheels of person was such a capitalist. sumption realities of human civiliza- enterprise and permit more and more tion. New products and services were current investment secured by legal in- As the capitalist form of production terests in receipt of future income gave grew in scale, sophistication in the use coming into being as enterprise employed new machines and techniques to capitalism serious capabilities of rent of money also blossomed. Credit was seeking. made available to those who sought to production, driving out of use and present funds. Savings of some were fashion older products, services and Rents are returns to power, not to work transferred by intermediaries to others. modes of production. or to entrepreneurship. The primary Bills of exchange and bank notes were With this system, as even Piketty ad- form of power giving rise to rental in- issued and accepted as ready money mits, life got better for everyone in gen- come is legal title or some other form of available to buy “stock” and support eral. What Schumpeter did not discuss right under law or contract. production. Firms called factors would were the externalities for society and Earning rent as a landlord is made pos- advance goods on credit or buy goods the environment of this exponentially sible, first, by a public legal system that for resale for cash or on credit. Finan- expanding use of technology for eco- grants title of ownership and protects cial intermediation became a vital sec- nomic gain. Thus, capitalism’s success that title against all others, and, second, tor of the capitalist economy, repre- in growing material goods and services some contract right to receive money sented most of all by stock exchanges and stock trading. The financial sector mingled generic wealth as contained in money with enterprise capital, which was that part of social wealth devoted to capitalist production. Hernando De Soto in his recent study of poverty and slums recommends the expansion of legal title to give people more ownership of assets which they can then use to fund small enterprises. (De Soto, The Mystery of Capital)

Capitalism and Rent Seeking So, to analyze the pros and cons of capitalism as a system of wealth creation as Marx and Piketty propose to do in their treatises, it is not enough just to talk about wealth and money in general

______TRUSTING N°7 – January/June 2015 83 INVESTING / Global Economy and Central Banks

or other consideration in exchange for workers, and use that monied wealth to spent. When they are saved, they may limited use of the property. buy more contract rights to the receipt or may not be transformed into produc- Most financial investments of money of more future rent payments. Those tive capital stricto sensu. They may only depend on contract rights protected by paid only wages for their work, he saw, be invested as money in the purchase law as well. Purchase of a share of stock and had little if any chance to partici- of contract rights to earn more money, in a corporation – or a limited partner- pate in such accumulation of wealth. thus inflating asset prices but not real ship interest, or a bond, or a debenture, In this sense, contract rights in finan- domestic output. If they are spent, they a share of preferred stock, an option, a contribute to increased demand for futures contract, a collateral debt obli- cial intermediation are akin to the rent potential of gambling. To win at poker goods and services. But if no new pro- gation, a loan or share thereof – gives duction enters the market to meet the no power to manage, direct, or make one relies on the rules of the game. demand, the new demand may only decisions for a productive enterprise. Contract rights specify the priority of Such contracts do no more that prom- cards and allocate each pot according lead to inflation in nominal prices. ise a share of returns under certain con- to the composition of various hands. The bedrock of growth is productivity, ditions as specified in their terms. A range of other legal rights create rent not money in circulation. Circulating Thus, financial investment in business- in the form of protection of intellectual money must be used in the right way in es run by others is more like using cash property. License fees and royalty pay- order for real growth to occur. wealth to earn future rents than it is to ments are rents for the use of what be- Piketty conflates capital stricto sensu profiting from direct capitalist -owner ship. longs to another. with wealth and so considers that the return on capital is a rent, not some And it was the rent aspects of financ- Those who live on the rents from wealth contribute less to economic special category of return with a quali- ing industrial production that most tatively different ethical character: aggrieved Marx and set his ire ablaze. growth than those who seek a return “Rent is not an imperfection in the market: He was angry that the owners of enter- from wealth invested as capital in en- it is rather the consequence of a ‘pure and prise could take cash wealth, which he terprise. perfect’ market for capital, as economists thought was surplus value created by The proceeds of rent can be saved or understand it: a capital market in which each owner of capital, including the lease capable of heirs, can obtain the highest possible yield on the most diversified portfolio that can be assembled in the national or global economy. To be sure, there is something astonishing about the notion that capital yields rent, or income that the owner of capital obtains without working.” (p.423) One of Piketty’s recommendations for resetting the social outcomes of wealthism is to create a new category of rents. He would give the poor legal rights to enjoyment of “a certain number of good deemed to be fundamental”. (p.479) He justifies this use of government power to redistribute money as a “principle of equal access” to such fundamental goods. Here Piketty merely endorses the practices of the modern entitlement, or welfare, state. Rents can be charged as a result of holding other forms of power as well. A mo- Millet’s ‘The Gleaners’ nopoly or a cartel gains market power

______84 TRUSTING N°7 – January/June 2015 Global Economy and Central Banks / INVESTING

to control pricing and extract money The income received by governments regulation is not likely to be widely dis- for goods or services over and above when exercising the power of taxation tributed across a population. is a rent paid by society. Thus, govern- the price that would be set by compe- The US financial sector contributed ment spending on wages for its employ- tition. The competitive price would be 7.9% to GDP and took out in total com- ees or on transfer payments for health the return on capital while the overage pensation 9% of GDP. would be a rent. care, education, and welfare, takes the form of passing on rental income to Rent seeking, in general, because it is Money itself is a form of power, there- chosen persons. In their recent book insulated from harsh market dynam- fore it can command returns not neces- Why Nations Fail, Daron Acemoglu and ics through its reliance on non-marker sarily disciplined by competitive mar- James A. Robinson argue that a major power, provides higher returns for low- ket forces of supply and demand. It can impediment to the success of capitalist er risk. Piketty thus notes that the av- generate rent, or income received not take-off is rent extraction by govern- erage wealth of the richest twenty-mil- due to work or to assuming the risk of ments. Rent seeking compromises the lionth people in the world grew from capitalist enterprise. dynamic potential of capitalism. $1.5 billion in 1980 to nearly $15 billion in 2013, for an average growth in assets Today’s money in the form of fiat cur- Piketty observes that since 1980 in- of 6.4% a year above inflation. (p.434) rency gains its power from legal con- equality of income and wealth distri- tract. Because fiat currency is made butions has grown. (p. 220, 221) This may On average it seems that wealthy by government authority legal tender well be the result of a tilt in economic families and individuals don’t use all for the payment of debts, such mon- activity away from earning returns on their rental income from ownership of ey is unconditional economic power. capital to increased rent extraction contract rights for consumption. They Money in the form of demand depos- from society. Access to rents from in- plow a significant proportion of earn- its, money market funds, and similar creased use of intellectual property, fi- ings and gains on the nominal market custodial arrangements also consists nancial intermediation, and protective value of their paper assets into the of contractual rights to immediate possession. Money is perhaps society’s most perfect form of unrestricted private discretionary power. Piketty demonstrates the power of money to make money with analysis of how the fortunes of the most wealthy people earn more than do the assets of the only moderately well-off. Other forms of power produce rents as well. Mafias and shake-down rack- eteers extract rents from those subject to their demands, extractions backed by credible threats of punishment for disobedience, rather than earn wages or a profit from productive enterprise. Cronyism in securing preferential treatment from government, which generates benefits from political or regulatory interference with market demand or pricing to limit competition, also produces rents.

______TRUSTING N°7 – January/June 2015 85 INVESTING / Global Economy and Central Banks

purchase of more contract rights, thus versation ends in a conspiracy against insults, nor sometimes from real danger, boosting asset prices from which they the public, or in some contrivance to arising from the insolent outrage of furious benefit far more than do those who live raise prices.” (P.128) Smith saw how the and disappointed monopolists.” (P.438) off wages. temptation to fix prices – to extract a Piketty agrees with Schumpeter that rent – had great appeal to those with For example, the average per family or capitalism stricto sensu is good for soci- money to invest. per capita savings of ordinary working ety: “No one denies that it is important Americans are paltry. Smith also commented acerbically for society to have entrepreneurs, in- on the difficulty of getting freedom ventions, and innovations. The prob- Adam Smith noted that in towns where of trade and competition put into law lem is simply that the entrepreneurial people were maintained by the em- to replace rent seeking monopolies in argument cannot justify all the inequal- ployment of capital they were industri- business and commerce: ities of wealth …” He adds that, sadly, ous, sober and thriving but communi- “Entrepreneurs … then to turn into ties where people were maintained by “ … like an overgrown standing army, rentiers, not only with the passing of the spending of revenue (the proceeds [business people] have become formi- generations but even within a single of rent) people were idle, dissolute and dable to the government, and upon many lifetime…” (p.443) poor. (P.319) occasions intimidate the legislature. The member of parliament who supports every The American Louis Kelso provided As rent seeking increases, the competi- proposal for strengthening … monopoly is an interpretation of capitalism, which tive advantage of capital investment sure to acquire not only the reputation of corresponds to both the emphasis of in enterprise evaporates. Income from understanding trade, but great popularity Schumpeter on creative destruction rents comes with less risk than invest- and influence with an order of men whose and the concern of Marx and Piketty ment in businesses. numbers and wealth render them of great over the relative vulnerability of wage Adam Smith recognized with concern importance. If he opposes them, on the labor as against ownership of produc- this advantage to owners of wealth of contrary, and still more if he has authority tive capital assets. Kelso argued that investing in rents rather than in truly enough to be able to thwart them, neither under conditions of division of labor capitalist enterprise subject to the risks the most acknowledged probity, nor the and the introduction of new technolo- of the market: “People of the same highest rank, nor the greatest public ser- gies to increase productivity, labor will trade seldom meet together, even for vice, can protect him from the most infa- always suffer. The need for labor will merriment and diversion, but the con- mous abuse and detraction, from personal always be changing and the need for workers will correspondingly change as well. The direction of those changes will be towards fewer and fewer workers having higher and higher skills. In short, the dynamic of capitalism is to replace workers with machines. In this system workers are price takers and not price makers. They must com- pete for the jobs available without being able to create jobs for themselves. Only capitalists stricto sensu can create opportunities for employment. Since the beginning of the industrial age, economic growth has been able to provide new sources of employment to absorb the working hours of those whose labor contribution became no longer needed and those new to the work force. But in recent years, unemployment and underemployment has been historical-

______86 TRUSTING N°7 – January/June 2015 Global Economy and Central Banks / INVESTING

ly high in the EU and the United States. The evolution of technology into digital communications and miniaturiza- tion of computing sophistication has, more and more, led to the replacement of workers with machines on an un- precedented scale. Kelso’s response to this trend in capital intensive production was to invent contract rights which would give workers access to capital assets, adding to their wages income from firm profits and investment rents. Kelso’s recommendations to intentionally diffuse more widely the ownership of productive capital point to a general ethical consideration about wealthism. With wealth understood as monied power, and with money in and of itself a source of power, the ethical considerations arising about wealthism are those that come into play when power is as work. cated social structure of a very wealthy am calling capitalism in order that the A sense, on the one hand, of demand- elite and a large lower class, both de- economy of his new nation grow reli- ing self-restraint and responsibility pendent on rents for their well-being. ably. But he warned that: from those in possession of any power, and, on the other, an intuitive standard “Tis the portion of man assigned to him by of fairness or due balance combine to Conclusion the eternal allotment of Providence that direct our attention first to those with- every good he enjoys, shall be alloyed with Piketty’s estimate that inequality of in- out power, to those most vulnerable. ills, that every source of his bliss shall be a come and wealth will increase due to The ethic arises almost as a first prin- source of his affliction – except virtue alone, lower economic growth and declining ciple inductively acknowledged that the only unmixed good which is permit- populations does not take proper ac- power should be held as an office in ted to his temporal condition … The true count of the potential role of capital- service to some great good than self- politician … will favor all those institutions ism. If the economy remains skewed indulgence. The American philosopher and plans which tend to make men happy towards rent seeking, then the trends John Rawls and the economist Amartya according to their natural bent which mul- Piketty highlights will come to sad frui- Sen both have constructed theoretical tiply the sources of individual enjoyment tion. But if a more robust capitalism, approaches to justice, which further and increase those of national resource and genuine creative destruction trans- this equitable objective. strength – taking care to infuse in each case forming the status quo, can be stimu- all the ingredients which can be devised as Any economy, then, which turns away lated, higher growth will result and the preventives or correctives of the evil which from promoting genuine capitalism to- severity of inequalities will decline. is the eternal concomitant of temporal wards more rent seeking turns itself to- The policy guidance recommended by blessing.” wards more irremediably inequality of Piketty’s study of inequalities of wealth distribution of its generation of wealth and income is simple: promote capital- and income. Large scale financial in- ism, minimize rent extraction. termediation, intense regulation, and generous provision for entitlements But perfection in human affairs is rarely are the structures which can turn any achieved. Alexander Hamilton, the first Stephen B. Young modern post-industrial economy away Treasury Secretary of the United States Global Executive Director from robust capitalism towards a bifur- was dedicated to the advance of what I The Caux Round Table

______TRUSTING N°7 – January/June 2015 87 INVESTING / Global Economy and Central Banks

Currency Wars, the Ruble and Keynes

The specter of currency wars once system. It is noteworthy just how pre- again haunts the international chatter- dictable the unintended consequenc- ing classes. Remember back in 2011, es are. While the sanctions imposed when Brazilian finance minister Guido against Russia have clearly contributed Mantega blamed the U.S. for deliber- to ruble weakness, they have massively ately weakening the greenback to gain strengthened President Vladimir Putin’s a competitive advantage? Well, now hand. the shoe is on the other foot. Thanks to the sanctions imposed The Yen – an important regional cur- against Russia, President Putin’s sup- rency – recently sank to a seven-year port rose to 88 percent in October, ac- low against the now mighty U.S. dol- cording to Russia’s most independent lar (USD). This is putting downward polling group, the Levada Center. Un- pressure on the Korean won and other doubtedly, Putin got another boost in Asian currencies. The situation is similar the polls after the shabby treatment he Steve H. Hanke in Africa where the Kenyan shilling has received in Brisbane, Australia at the hit a three-year low against the USD; meeting of the Group of Twenty (G20). [email protected] the Nigerian naira recently set an all- @Steve_Hanke Diplomacy is dead. This is dangerous. time low against the dollar; the Ghana- As Clifford Gaddy, a Russian expert at ian cedi has shed over 25 percent of its Steve H. Hanke is a Professor of Ap- the Brookings Institution in Washing- plied Economics and Co-Director of value against the greenback this year. ton, D.C., recently remarked, “I fear very the Institute for Applied Economics, The big Latin American loser is the Ven- much that … there is an element of Global Health, and the Study of Busi- ezuelan bolivar, followed by the hope- sleepwalking in the policies of key play- ness Enterprise at The Johns Hopkins less Argentine peso. Moving to Europe, ers in today’s world.” Gaddy was allud- University in Baltimore. Ukraine’s hryvnia has lost over 88 per- ing to Christopher Clark’s recent book, Prof. Hanke is also a Senior Fellow cent of its value against the USD this The Sleepwalkers, which chronicles at the Cato Institute in Washington, year, while the Russian ruble has racked the origins of the First World War. D.C.; a Distinguished Professor at the up a loss of over 43 percent against the Universitas Pelita Harapan in Jakarta, greenback in the same time span. The In addition to the Russian-Ukrainian Indonesia; a Senior Advisor at the list could go on, but let’s focus on Rus- conflict, the ruble has been put under Renmin University of China’s Inter- sia and the travails of the ruble. pressure because of the recent slide in national Monetary Research Institute the price of oil. As the accompanying in Beijing; a Special Counselor to The ruble, while it has not been hit as chart shows, Russia’s fiscal accounts the Center for Financial Stability in hard as the hryvnia, has sharply depre- balance when the price of oil is about New York; a member of the Financial ciated because of the Russian-Ukraini- $102 per barrel. If the present price of Advisory Council of the United Arab an conflict and the sanctions that it has less than $80 per barrel persists, it will Emirates; a contributing editor at spawned. The sanctions are, of course, put most oil producers, including Rus- Globe Asia Magazine; and a member a mug’s game. Indeed, sanctions have of the Supervisory Board for the Ad- sia, in a fiscal squeeze. almost universally failed to achieve vanced Metallurgical Group (AMG). their objectives. The one thing they do, The ruble’s dive has been associated Prof. Hanke’s most recent books are though, is to impose real costs on many with the plunge in the price of oil, cou- Zimbabwe: Hyperinflation to Growth intended and unintended victims, in- pled with a series of damaging events (2008) and A Blueprint for a Safe, cluding the international economic (see the accompanying chronology). Sound Georgian Lari (2010).

______88 TRUSTING N°7 – January/June 2015 Global Economy and Central Banks / INVESTING

The depreciating ruble means that Rus- sian imports will be more expensive and exports more competitive. This combination will help keep Russia’s current account positive, which will offset some of Russia’s massive capital flight. In addition, Russia’s fiscal accounts are denominated in depreciating rubles and its oil exports are invoiced in an appreciating USD. So, the fiscal blow from lower oil prices will be cushioned by a weak ruble. Perhaps it was a weak ruble strategy that Putin was alluding to when he recently stated that Russia was braced for a “catastrophic” slump in oil prices. But, there are limits to any temporary These events are benefits from a ruble rout. When -a cur indicated on the rency takes a dive, the specter of inflation next chart which is always right around the corner. And shows the course with inflation, Putin will see his poll num- of the ruble against bers come off their highs. What to do? the USD. Russia should abandon the floating ex- Also shown are change-rate regime, which it adopted the 10- and 40-day on November 10th. Oil and other com- moving averages modities that Russia exports, are priced for the RUB/USD and invoiced in U.S. dollars. By embrac- exchange rate, as ing a floating exchange-rate regime, well as the price Russia is inviting instability. The ruble’s of Brent crude per nominal exchange rate will fluctuate barrel. with oil and other commodity prices. When the price of oil rises (falls) the But, that’s not the ruble will appreciate (depreciate), and end of the story. Russia will experience a roller-coaster As the above chart ride distinguished by deflationary lows shows, the ruble’s and inflationary highs. To avoid these volatility has wild rides, most of the big oil producers soared. Indeed, – Saudi Arabia, Kuwait, Qatar and the whiplash collars should be standard United Arab Emirates – link their cur- issue for the brave rencies to the U.S. dollar. Russia should souls who are trad- do the same. ing the ruble. To get things right, Russia should lift a The ruble charts page from John Maynard Keynes’ Rus- look pretty ugly, sian playbook and establish a currency but they contain a board. bit of a silver lining, Under a currency board system a cen- in the short-term. tral bank issues notes and coins. These

______TRUSTING N°7 – January/June 2015 89 INVESTING / Global Economy and Central Banks

are convertible into a foreign reserve currency at a fixed rate and on demand. As reserves, the monetary authority holds high-quality, interest bearing securities denominated in the reserve currency. Its reserves are equal to 100 percent, or slightly more, of its notes and coins in circulation, as set by law. A central bank operating under a currency board rules does not accept deposits and it generates income from the difference between the interest paid on the securities it holds and the expense of maintaining its note and coin in circulation. It has no discretionary monetary policy. Instead, market forces alone determine the money supply. There is an historical precedent in Russia for a currency board. After the Bolshevik Revolution, when troops from Britain and other allied nations invaded northern Russia, the currency was in chaos. The Russian civil war had begun, and every party involved in the con-

flict was issuing its own near-worthless money. There were more than 2,000 separate issuers of fiat rubles. To facilitate trade, the British established a National Emission Caisse for northern Russia in 1918. The Caisse issued “British ruble” notes. They were backed by pounds sterling and convertible into pounds at a fixed rate. Kurt Schuler and I discovered documents at the archives in the British Foreign Office which prove that the father of the British ruble was none other than John Maynard Keynes, who was a British Treasury official at the time. Despite the civil war, the British ruble was a great success. The currency never deviated from its fixed exchange rate with the British pound. In contrast to other Russian rubles, the British ruble was a reliable store of value. Naturally, the British ruble drove other rubles out of circulation. Unfortunately, the British ruble’s life was brief: The National Emission Caisse ceased operation in 1920, after allied troops withdrew from Rus- sia. Yes, it is time for Putin to lift a page from Keynes and follow what most large non-U.S. oil producers already do: link the ruble to the greenback. Steve H. Hanke

______90 TRUSTING N°7 – January/June 2015 The International Network of Independent Finance Experts

Created in 2009, E-MERGING is the fi rst B2B social network dedicated to independent fi nancial experts. Free of charge for members and represented in over fi fty countries, the network gathers strategic professions involved in wealth management. Join us! e-merging.com

Annonce_209,9x292,81_CIFA.indd 1 25/02/2015 15:08 INVESTING / Practical Investing

The Bitcoin or the big con?

Le Bitcoin, o u l a g r a n d e escroquerie ? «Je vous parle d’un temps que les moins de vingt ans ne peuvent pas connaître» (Aznavour), l’Europe en ce temps là n’existait pas encore. Les choses ont bien changé depuis pour le Dollar, avec le retrait du Yen, l’arrivée de l’€uro, la montée du Renminbi. Pour nous, survivants de la préhis- toire financière, il est un rappel important, pré «âge du tout tactile». Avant l’émergence du 2.0, les problèmes étaient les mêmes, juste résolus avec des moyens différents. Qui se souvi- ent de FINACOR? (l’ancêtre d’EXANE). Cette société familiale, établie à Paris à la sortie de la 2° guerre mondiale, sous la houlette d’un patriarche qui trônait au bout d’une immense table vieux continent elles s’appelèrent eu- Le système financier s’en est fort bien de salle à manger transformée en salle rodevises. FINACOR eut donc l’idée gé- porté jusqu’en 1989, et l’âge d’or vit de change, régnait sur la place de Paris, niale de faire investir les eurodevises. Il aussi l’arrivée des euro-crédits. La Per- place Vendôme. s’agissait de faire travailler à l’Ouest les estroïka puis la chute du Mur de Berlin, En effet, son fondateur avait été le 1° devises in-importables à l’Est. dont on célèbre l’anniversaire en cette courtier à travailler sur les eurodevises. Comment? Il suffisait de rédiger des année 2014, ne sont pas anodines, car C’était bien sûr à l’époque de la guerre obligations, gagées sur ces stocks de le système s’écroula peu après, en 1992, des deux mondes, le capitaliste contre monnaie, échangeables sur les marchés la convertibilité étant revenue avec le soviétique. Rideau de fer oblige, le financiers ensuite. La titrisation ou les l’effondrement que l’on sait. Rouble était inconvertible. Solution? sub-primes n’ont rien inventé de nou- Pourquoi ce rappel? D’abord pour Pour permettre les échanges interna- veau. Sauf que là on était sur du vrai rendre hommage au génie d’un seul tionaux, il fallait bien que, entre les fi- argent, émis par des Banques Centrales homme, aujourd’hui bien oublié de bres, trous ou les mailles lâches dudit solvables, et permettant les échanges l’histoire, M. Victor TOTAH. Mme Angela rideau, le commerce fonctionne. On internationaux. Des eurodevises ont MERKEL, opposée aux €uro-obligations vendait donc et on achetait aux pays donc découlé les euro-obligations, ve- pourrait donc relire l’histoire financière de l’Est, Russie en tête, via la BCEN. nant concurrencer les émissions locales des années 80. Toutefois, impossible de rapatrier en comme l’euro-Franc contre les Emprunts Russie les fonds, ou d’obtenir des Rou- d’Etat Français, l’euro-Yen contre les Ensuite et surtout, parce que l’adage «la bles en Occident. On créa donc des Samouraï, l’euro-Sterling contre les Gilts, bonne monnaie chasse la mauvaise» est devises «miroir» de celles convertibles l’euro-Dollar contre les Treasuries, l’euro- toujours d’actualité: de LAW au Louis et comme le marché était situé sur le Deutsche Mark contre les Bunds, etc. en or, des anciens aux nouveaux Francs,

______92 TRUSTING N°7 – January/June 2015 Practical Investing / INVESTING

de l’€uro au Deutsche Mark? (ou vice- Oui, tous les pays se sont ligués contre que d’enterrer dans la jungle des coffres versa, affaire à suivre…) la drogue et ses cartels. Pour autant, la scellés de papier monnaie qui peuvent consommation augmente si vite que, se perdre, pourrir, changer de mains etc. Enfin, parce que dans le concours de Etats après Etats, elle se légalise. Or, il est bien plus efficient d’embaucher un nettoyage des lessiveuses actuel au qui dit plus de consommateurs dit plus super hacker, un génie «geek» bref des seul profit des Etats-Unis et au total d’approvisionnements, qu’il faut bien marginaux géniaux, comme les Einstein détriment de l’Europe, de la Suisse et payer. d’aujourd’hui et de spéculer «tactile- autres grands naïfs du prédateur sans ment» en toute impunité. Des fortunes scrupules qu’est l’Oncle Sam, il faut C’est comme pour le pétrole: les champs se font ou se défont instantanément: tu bien voir que les Banques Centrales ne du Texas sont vides, les USA dépendent es mort, game over, et on recommence. maîtrisent plus la donne. des Emirats et de l’Arabie Saoudite? le Qui dit mieux? cracking prend le dessus (remarquez la De plus, à l’époque de FINACOR, pour similitude de sémantique avec la drogue Pour amuser la galerie et servir de cou- que le système fonctionne, il fallait une dure le crack…) et hop, les USA sortent verture, on laisse de simples particu- plaque tournante, et tout le monde de l’ornière. liers jouer dans la cour des grands, et était bien heureux que la Suisse ex- tout perdre sans remords. On sait déjà iste. On l’a oublié, mais par exemple, (Figaro Magazine, 17 octobre 2014) que l’organisme de troc de Renault était statistiquement «les particuliers qui établi à Genève, toutes les raffiner- Aujourd’hui spéculent sur les devises perdent de ies françaises construites à l’Est béné- l’argent dans 90% des cas. La perte ficiaient au profit des oligarques de “ le Bitcoin moyenne frôle les 10.900 €uros. Sur comptes numérotés alimentés directe- est l’exutoire quatre ans, 13.224 clients ont perdu ment par Bercy, afin que les signatures, au total 175 millions d’€uros. Les 1.575 sous les applaudissements, puissent des mafieux clients restant n’ont empoché que 13,8 se faire pour les «contrats du siècle» et en tous genres millions.» (Source: AMF qui engage une ainsi paraître à la Une des journaux. De ” campagne de publicité digitale pour sen- même, bien avant l’incompréhensible sibiliser aux risques du FOREX) Alors, sur saga de CLEARSTREAM! CEDEL et EU- une monnaie virtuelle! Toutefois l’écran Comment? Par recyclage des énormes ROCLEAR assuraient, au Luxembourg de fumée fonctionne bien: «FLOP: Le masses monétaires générées par une compensation de qualité aux div- Bitcoin … présentée comme la pana- les politiques accommodantes des ers opérateurs financiers en euro-obli- cée en matière d’échanges mondiali- Banques Centrales. Double effet: gations. Sit transit gloria mundi! sés, s’avère bien fragile. Elle a décroché — Asphyxie des opérateurs locaux par de 35% de manière irrationnelle lundi Rajoutons le principe calamiteux du overdose de régulation dernier» (Le Figaro Magazine, 22 août «too big to fail» appliqué depuis 2008. 2014), ou la démonstration de savoir Il vient tout juste d’être remis en cause, — Création d’une nouvelle monnaie bien analyser le résultat, mais pas la enfin, par le Gouverneur de la Banque souterraine, rendant ringardes cause! Les mafias gagnantes du monde celles, officielles, dont se servent d’Angleterre, M. Mark CARNEY qui dé- entier ont dû sabler le champagne! nonce le scandale du «pile je gagne, (encore) les touristes! Preuve à charge? Selon le journal Suisse face tu perds» qui a conduit à sur-ré- De fait, si la bonne monnaie des théo- La Côte du 21 novembre 2013: la valeur glementer le secteur domestique, et ries classiques chassait la mauvaise, du «Bitcoin … qui a fait parler d’elle lors se concentrer sur la paille, alors que la avec la création des eurodevises la no- de transactions illicites, a touché pour la poutre est ailleurs. tion de bien et de mal s’est relativisée: première fois la barre de 900$ mardi… fallait-il ou non fraterniser avec l’Ours Oui le Rouble est à nouveau à genoux, Elle s’échangeait quelques heures plus de l’époque pour sauver nos emplois? conséquence des sanctions Occiden- tard autour de 700$. .Début avril elle ne Aujourd’hui, le Bitcoin est l’exutoire des tales pour la Crimée, dans une con- valait que 200$». Il faut avoir le cœur mafieux en tous genres. joncture déjà défavorable à l’économie bien accroché car les chutes sont aussi locale. Pour autant, les investissements En effet, personne ne se pose la ques- brutales que rapides puisque sa valeur russes ont-ils diminué dans le reste du tion de connaître la masse monétaire a été divisée par quatre en deux jours monde? représentée par ce phénomène. Plutôt en avril 2013 et aimer les montagnes

______TRUSTING N°7 – January/June 2015 93 INVESTING / Practical Investing

«russes» car il est passé de 100$ à 400$ les potentiels de la monnaie» Bitcoin complémentaires» le Bitcoin est paré entre le 1° et le 15 novembre 2013. Il (ibid La Côte). Est-ce de l’angélisme, ou de toutes les vertus, car il la juge plus valait 4,15€ en 2011… bien cela signifie «clairement» que les saine que les monnaies Etatiques, il se- USA recyclent ainsi des dollars «sales» Certes on est allé plus loin puisqu’il rait ainsi la «planche de salut des mon- destinés à des trafics d’influence en y a maintenant des distributeurs de naies mal gérées». On en revient donc tous genres autour du monde. Simple Bitcoins aux coins de rue de Genève toujours au principe de substitution spéculation sans fondement? En effet, (janvier 2014) ou d’ailleurs, en parte- d’une monnaie par une autre. Alors, il faut oser écrire comme patron de la nariat avec le canadien Bit Access, après la votation sur l’or, à quand une FED, à propos de cet univers sans foi ni leader mondial des DAB. Swiss Bitcoin sur les réserves en Bitcoin de la Banque loi, que ces monnaies virtuelles «peu- EXchange, le premier négociant en Bit- Centrale Suisse? vent être prometteuses à long terme coin Suisse a été autorisé par la FINMA Restons sérieux? Pas si sûr, car il convi- d’un système de paiement plus rapide, en juin 2014. Les gogos n’ont jamais ent de noter que la Suisse a un sérieux plus SECURISE et plus efficace»: incon- manqué, des Emprunts Russes au Ca- avantage: l’antériorité. En effet, post science ou cynisme délibéré? nal de Panama. Promettez la lune et il y crise de 1929, depuis 1934 (non ce n’est aura toujours un crédule pour l’acheter, pas une erreur de frappe) existe le WIR VIRGIN le sait bien. La cupidité con- (nous autres), monnaie de service entre tinue à animer les marchés financiers, 60.000 entreprises suisses. Cela rap- des tulipes hollandaises à nos jours, et pelle le défunt ECU (European Currency les délits d’initiés de fonctionner, de Unit) précédent l’€uro, et inaccessible Waterloo à aujourd’hui. Toutefois aux particuliers. 1 WIR = 1 CHF. selon Alexis ROUSSEL, CEO du SBEX, La CIFA lors de sa XI° conférence l’autorisation de la FINMA fait que annuelle en 2013 avait réalisé une «le Bitcoin est considéré comme un table ronde sur le sujet des mon- moyen de paiement en Suisse, et un naies de substitution: «Table ronde dépôt en Bitcoin comme un dépôt 4: Quels sont les effets négatifs de la bancaire». Il reste à prouver, cepen- régulation bancaire sur la capacité dant, que l’on puisse obtenir un crédit des banques à prêter au secteur privé? Lombard sur ces actifs si volatils… Quelles sont les conséquences des exi- Bref, au lieu que nos guignols de ban- gences du Bâle III? Vue d’ensemble des quiers centraux continuent à vouloir instruments bancaires alternatifs non laver plus blanc que blanc et oublier la Après les faucons, les colombes: Steve sujets aux problèmes de liquidité. croissance en route, ils feraient mieux HANKE, Professeur d’Economie à Balti- — Comment la régulation pourrait de s’intéresser à pourquoi l’industrie du more indique que «si le Bitcoin grandit surmonter le dilemme entre le ren- crime continue à fonctionner comme et devient compétitif, il tombera SOUS forcement des banques et assurer le si de rien n’était: Al CAPONE recyclait LE COUP DES AUTORITES qui essaieront crédit adéquat aux entreprises? dans les blanchisseries, leurs homo- de le réglementer». On est toujours — Est-ce possible d’encourager des logues actuels dans le Bitcoin. La rec- en retard, non pas d’une bataille, mais systèmes bancaires qui sont plus ette n’a pas changé: plus c’est simple d’une guerre, et en l’espèce d’une gé- efficaces dans le financement des et évident, moins c’est visible! Steve nération virtuelle dans ce domaine! Il activités économiques et qui dépen- HANKE l’a dit au Sénat américain: «La rajoute: «Il devient une alternative LE- dent moins des liquidités ? forte demande pour le Bitcoin a été mo- GITIME pour transférer de l’argent et tivée par les exigences que font peser un moyen de paiement de plus en plus — Est-ce que des formes alternatives les réglementations». La prohibition viable». Protection de la sphère privée de finance, comme des monnaies locales, des systèmes de compensa- financière existe donc depuis 2008 au et Bitcoin même combat? On ne rêve tions et de l’aide au renforcement moins, c’est officiel. plus, on plane! des capacités commerciales pour- Donc plus l’arbre est gros plus il cache Si l’on en croit Philippe HERLIN, Doc- raient réduire les demandes de li- la forêt et on peut rêver en écoutant teur en Economie et auteur de «La quidités des banques sans réduire le Ben BERNANKE qui «a clairement salué révolution du Bitcoin et des monnaies crédit aux entreprises?»

______94 TRUSTING N°7 – January/June 2015 Practical Investing / INVESTING

Il y a plus de 5.000 monnaies locales réussi, et il sera bientôt trop tard pour Bitcoins ne s’échangent pas (encore) entre non convertibles (sauf dans leur pays) contrer ces pratiques. plateformes. La faillite de Mt GOX au Japon de par le monde aujourd’hui. Au-delà, en février 2014 a volatilisé 850.000 Bitcoins A chacun donc de se faire une opinion. pour une contrevaleur de 460 CHF millions. Monoprix (groupe CASINO) acceptera Ce qui est sûr c’est que ça fonctionne. Ils n’ont certainement pas été perdus pour les Bitcoins d’ici fin décembre 2014 Reste à savoir pour qui. tout le monde: à quand des options à la pour ses commandes. baisse sur le Bitcoin? D’autant qu’avec les démêlés en dollars On est donc dans un marché OTC (Over de la BNP, UBS ou autres Crédit Suisse the counter) non réglementé, de gré à gré. Gilles-Guy de SALINS Toutefois les échanges sont «monitorés» et Vontobel, selon François VELDE de Membre du Bureau exécutif CIFA par un groupe de «mineurs» rémunérés en la FED, cette «technique pourrait bien Membre du Comité consultatif FECIF Bitcoins (25) pour valider la solvabilité des être utilisée par les institutions finan- parties. Vice-Président ANCDGP cières elles-mêmes (POUVANT CREER De fait les livres de comptes sont anonymes, LEUR PROPRES BITCOINS), voire par les mais ouverts à tous. Sauf que les pseudos gouvernements eux-mêmes». Bitcoins sont invérifiables. Penser obtenir un KYC et de tous pays unissez-vous? un bénéficiaire final des transactions est un fantasme de technocrates. Quelques chiffres et données: A mon humble avis, le «bit coin» n’est, Selon des statistiques incontrôlables, 80 comme son nom l’indique, que le pe- Le Bitcoin a été créé post 2008 par un infor- maticien inconnu répondant (?) au pseudo à 88% des Bitcoins seraient thésaurisés. tit morceau de la pièce entière. On ne de Satoshi NAKATAMO. De là à en pouffer Quand on sait que près de 50% des billets voit que le périscope d’un sous-marin de rire, le pas a été franchi par Haruhiko de 500 FF n’ont pas été convertis en €uros colossal. En effet ce petit morceau agit KURODA, Gouverneur de la Banque du au moment de leur inconvertibilité, cela donne beau jeu aux fabricants de rêve! comme le poisson pilote du requin qu’il Japon, qui a considéré cette monnaie vir- dirige ou suit, selon l’opinion de cha- tuelle le 8 avril 2014 comme du faux argent. L’âge moyen des «bitcoiners» est de 30 ans, Vrai pour partie aujourd’hui, mais il pourrait cun. Pour moi, vu les montants actuels, à 88% des hommes, en France. La finance logiquement rire jaune à terme … ce qui se- comportementale a un beau sujet d’étude c’est une tempête dans un verre d’eau, rait un comble. devant elle. au dessus de la nappe phréatique sou- Il échappe totalement au contrôle des Les motivations des internautes sont con- terraine, mais ceci permet à chacun de Banques Centrales. Son origine lointaine nues: 27% pour l’investissement et la spécu- fourbir ses armes: trafiquants en tous est la fin de l’onde du choc NIXON, décré- lation, les transactions confidentielles et genres, Etats souverains, puissances fi- tant l’inconvertibilité du Dollar en or et la sécurisées pour 16%, des opérateurs «inca- nancières et régulateurs. Le menu fre- fin unilatérale de l’accord Bretton Woods en pables mineurs» pour 10%, afin d’échapper 1971. On pourrait dire, en caricaturant, que tin reste la proie de tous. à toute fiscalité pour 8% et la recherche le choix du Général de GAULLE de trans- d’anonymat pour 7%. Il y a donc sans l’ombre d’un doute former systématiquement les réserves de la Banque de France de Dollar en or jusqu’à Les «geeks» sont majoritaires, seuls 10% d’autres monnaies discrètes qui son départ en 1969 en est la cause politique sont des professionnels de la finance, les -fi s’échangent entre trafiquants. Le Bit- première. A quand son profil avec son képi nanciers n’y comprennent encore rien, c’est coin ne sert qu’à roder les pratiques. sur les pièces en circulation? un «truc» d’informaticiens. 65% des «bit- Comment expliquer autrement la pro- coiners» croient en cette «devise» contre C’est à la fois une devise universelle et un 23% dans leurs monnaies officielles. fusion d’armes et de conflits partout système de paiement sans structure cen- dans le monde? L’argent «officiel» ne tralisée, entre participants. Des DAB sont C’est la base de données la plus sécurisée suffit pas. A un angélisme de bon aloi maintenant présents dans de nombreux au monde (et pour cause…) avec une puis- pays. Toutefois, limité à un montant émis sance de calcul inégalée, selon Alain TREC- croyant toujours à un monde meilleur de 21 millions il est légitime de s’interroger CANI, doctorant au Swiss Finance Institute. demain s’oppose la réalité d’un monde sur les fluctuations de cours sur un si petit Toutefois seuls 28% des détenteurs ont con- virtuel actuel dans lequel quelques- encours: face émergée de l’iceberg? En ef- fiance dans sa sécurité, 26% craignent un uns manipulent le reste. Et le reste fet chaque détenteur personne physique vol sur leur ordinateur, 25% de perdre leurs c’est 99% de gens comme vous et moi, en a peu, 69% moins de 10, achetés après données, et 21% l’apparition d’un virus an- la flambée de 2013. Il y a peu de million- ti-Bitcoin. Pour preuve, le porte-monnaie englués par des Administrations plus naires de la première heure, mais tous (83%) numérique INPUT.IO a été victime d’un vol soucieuses de préserver leur pré carré pensent qu’il va monter dans les 3 ans. d’un million de CHF en avril 2014. que du bien public, et qui polluent à Des plateformes standardisées de cotation Enfin, la devise du Bitcoin sur les pièces tire larigot les citoyens prisonniers des existent: SBEX et consorts en occident, émises est: Libertas, Aequitas, Veritas. monnaies légales. L’effet diversion est BTC China de l’autre côté. Attention, les Quelle profession de foi!

______TRUSTING N°7 – January/June 2015 95 INVESTING / Practical Investing

Overcoming the Behavioral Barriers to Smarter Investing

Summary: When looking at examples of behavioral biases, they fall broadly into two groups: • Investing & planning is more affected by investor behavior. those that affect the making of an invest- • Science has proven that different biases and behavioral pitfalls ment, and those that affect the manag- can be indicated and solved. ing of an investment. • The financial world and the products created become more sophisticated ‘under the bonnet’ but need to be simpler and Behavioral biases that affect easier for customers to understand. the making of an investment • Clients strive for robust simplicity, transparency and good value. An c h o r i n g When deciding how much to allocate to * * * a savings plan, decisions are anchored Good investment practice is often making. Analysis of equity allocations to maximum percentage of salary con- thought of as consistent common for the period 1992-2002 for over a mil- tribution rates offered by an invest- sense. While the financial aspects of lion accounts reveals that individuals ment plan or the match offered by the investment planning are, or should frequently end up buying high and sell- employer. This means the presentation be, carefully considered, it is often the ing low (Benartzi and Thaler, 2007). of contribution rate options can have behavioral aspects which can distract an impact on the actual level of contri- In a market where information advan- clients and advisers alike from achiev- butions made. tage has been competed away by the ing good outcomes. Left to their own rapid growth in financial media and devices, investors (and possibly their ad- In e r t i a information resource, what behav- visers) on average do more harm than Almost all individuals recognize that ioral traits might be causing investors good to their portfolios relative to an not taking timely decisions about how to inflict so much relative damage on index-based approach, as the figure savings are invested can be costly and their portfolio and how can they be below suggests in broad terms for US impinge on ones future happiness, es- avoided? investors (Dalbar, Inc. & Lipper, 2010). pecially during retirement. However, a In this article, we try to identify a few majority of individuals also tend to put Of the 5-6 percentage points difference behavioral pitfalls, based on academic off deliberating and deciding about in returns, only a small amount is due to and practical insights. We look at why their investments to a future date. This fees. The rest is due to poor decision- smart individuals inertia to attend to investment deci- might be unable to execute smart investment decisions. Finally, we look at how innovative investment products are trying to design out detrimental behavior and closing ‘The Behavior Gap.’

______96 TRUSTING N°7 – January/June 2015 Practical Investing / INVESTING

sions is so profound that opt-in rates The same has been shown true for De- create significantly greater pain than are only 50% percent even in defined fined Contribution pension plans in the same gain gives pleasure (Kahne- benefit plans where the contributions the US, where evidence suggests that man and Tversky, 1979). are made entirely by the employer! as the number of investment options So investors with long time horizons can Such oddities of investment decisions increased, participation in the pension be put off from investing by witnessing and preferences extend to investment scheme fell (Iyengar and Jiang, 2003). In short-term losses, and therefore adopt allocation and rebalancing decisions as the context of a European fund indus- an asset allocation that is more con- well. While investors indicate a prefer- try with thousands of funds on offer servative than their long-run needs re- ence to construct their own portfolio this is food for thought. quire. In the most extreme case, savers over selecting a professionally man- with a 20 year time horizon prefer ‘safe’ aged investment solution, they vote for Na ï v e diversification cash and fall prey to the invisible risk of the managed solution as the superior When deciding how to allocate invest- inflation. Reporting frequency influenc- option (Benartzi and Thaler, 2007)! ments, individuals often resort to sim- es the negative impact of myopic loss ple rules of thumb (1/number of funds) aversion on risk taking. For example Ch o i c e Pa r a l y s i s (Benartzi and Thaler, 2001) or arith- investors who viewed monthly reports With the number of investment op- metically simple division (e.g. 25-25-50 which included 4 negative reports out tions exploding and becoming increas- when three of many funds are selected) of 10 tended to allocate much less to ingly sophisticated, the task of putting (Benartzi and Thaler, 2007; Huberman equities (41% equity allocation) than together an ‘optimal portfolio’ that suits and Jiang, 2006). This means that the investors who viewed annual reports an investor’s long term objectives is by choice of investment options offered, which included 1 negative report out no means simple. In fact, let us leave and indeed, how they are presented, of 7 (70% equity allocation). Put differ- lay investors aside for a moment; even can have a material impact on asset al- ently, less news is good news to steady the Nobel Prize winner and inven- locations. Good diversification is one of nerves for a buy and hold strategy. tor of Modern Portfolio Theory, Harry the key things when doing good goal Markowitz, opted for a naïve 50-50 based investment planning and man- Pe r f o r m a n c e e x t r a p o l a t i o n split between stocks and bonds when aging an investment portfolio! asked how he allocated his personal Performance extrapolation, or chas- savings (Zweig, 1998)! Take up of funds ing winners – whether star managers is inversely related to the number of Behavioral biases that affect or ‘hot’ asset classes – is bad for your constituent instruments it contains. wealth. Studies by Grinold & Kahn This has been elegantly illustrated by the managing of an invest- (1995) support anecdotal evidence the so-called ‘Jam Experiment’ which ment that yesterday’s star managers struggle showed that when presented with to sustain strong investment returns, more choice, shoppers were more like- My o p i c l o s s a v e r s i o n and can often experience long losing ly to browse, but when presented with Investors are fundamentally loss averse. streaks. So, if star managers deliver, but less choice, they were more likely to Loss aversion is said to be ‘asymmetric’ not all the time, that is of little help in buy (Iyengar and Lepper, 2000). as the same loss has been shown to delivering investors with consistent re-

______TRUSTING N°7 – January/June 2015 97 INVESTING / Practical Investing

St a t u s q u o b i a s ancing strategy. Nobel Laureate, Dan- Once investors have finally taken a iel Kahneman, terms this deliberative course of action, due to inertia most thought process of an economic agent individuals resist making any changes as ‘System 2’ (Kahneman, 2011). Evi- to the allocations that they have made, dence from behavioral research, howev- hence do not perform regular reviews er, suggests that individuals volunteer or rebalancing. This status quo bias very little time to important financial leads to ‘set and forget’ mentality that decisions and adopt mental shortcuts, is dangerous if the suitability of the as- making choices instinctively without set allocation drifts from the required much effort, an approach known as turn and may not justify the active fees. objectives, particularly when these ob- ‘System 1’. Likewise, chasing ‘hot’ securities, mar- jectives are likely to change over time Although using simple heuristics may kets or sectors is rarely a smart strategy. as investment time horizons shorten. Potentially smart investors and their reduce the effort needed to make in- advisers are seduced by positive news So, having reviewed the symptoms, vestment decisions, if not applied care- flow and peer group referencing into how can we understand the causes? fully these heuristics lead to the biases herd following. At its most extreme, the An understanding of how we think discussed above and can generate sub lesson of the dot com bubble is a case about investments is informative in this optimal investment outcomes. For in- in point, but human behavior suggests respect. stance, naïvely splitting ones savings that this was not the last example of ir- amongst the products on offer can lead rational chasing of winners as surely as to investment portfolios that are influ- it is not the first. The psychology of investment enced by the nature of products offered decisions by the investment provider, which can Disposition e f f e c t skew the risk of portfolio inappropriate- Investment decisions broadly consti- There is also evidence that changes ly. By giving into short term emotional tute three distinct phases. First, inves- impulses or not taking appropriate lev- to allocations, if any, are propelled by tors (with their advisers) must decide emotional reactions rather than sound els of risk, investors may not attain their how much they want to invest. Then investment objectives. investment practice. One such reac- they must decide how to allocate their tion, known as the disposition effect, is savings. Finally, to ensure they stay on While we know we should take a Sys- the tendency of individuals to hold on track with their investment objectives tem 2 approach, the cognitive load as- to losing positions whilst selling win- they should review their portfolios and sociated with investment complexity ning stocks too soon (Shefrin and Stat- rebalance the allocations based on the means that we often resort to a System man, 1985; Weber and Camerer, 1998). performance. An ideal investor would 1 approach which may not be in our Resistance to book losses can be tax indulge in sophisticated computation best financial interests. inefficient and result in lower long term to determine the savings amount, op- returns. timal portfolio allocation and rebal-

System 1 System 2 Characteristics Fast, automatic, Slow, effortful, frequent, emo- infrequent, logi- tional, stereotypi- cal, calculating, cal, subconscious. conscious. Examples in Cognitive short- Create a financial investment cuts, simple plan, an optimal decision-making heuristics, naïve asset allocation diversification, strategy and a simple division rebalancing and review process.

______98 TRUSTING N°7 – January/June 2015 Practical Investing / INVESTING

Mitigating poor investment The principles of a behavior- ent managed investment solutions for an entire savings journey rather than behaviors ally adapted solution multi-asset funds that solve only a tem- We identify cognitive burden and We identify four principles which can porary investment decision problem. emotional stress as key ingredients help simplify investment decisions and Target date funds are examples of man- of investment decisions that lead to overcome poor behavioral tendencies. aged funds which offer a professionally managed investment journey tailored suboptimal investment decisions. Our First, investment tools should be geared to specific investment objectives and proposal, therefore, is that to mitigate towards creating a structured decision some of the poor behavioral tenden- process where investors are prompted their time horizon. The time-horizon cies outlined above, the investment to think about and articulate invest- driven approach to risk suitability process and decisions should be sim- ment objectives they care about. Goal makes target date funds a natural fit for plified and designed to alleviate the based investing is an example of such goal based investing. emotional strain and the cognitive load an approach which encourages inves- induced at various phases of invest- Third, portfolio risk should depend not tors to construct portfolios around con- only on psychological notions of risk ment decisions. Just as cars have got crete investment objectives. Goals cre- simpler to drive, while becoming dra- attitude but also take into account eco- ate emotional links between long term nomic factors such as risk capacity, time matically more sophisticated under the savings objectives and investment so- horizon and affordability. This broader bonnet, investment propositions need lutions designed to deliver these objec- meaning of risk suitability is reflected in to be engineered intelligently so that tives, thus mitigating the urge to act on Target date funds: rather than assume a they appear to be a convenient solu- short term impulses at the cost of long fixed risk profile for an investor through- tion to the otherwise complex problem term objectives, especially when the out the savings journey, the underlying of financial planning for the future. markets are turbulent. mix of diversified assets in these funds Why not strive for ‘Elegant Simplicity’? Second, to design out poor diversifi- shifts from a growth objective to an This means developing ‘behaviorally cation, the product offering should income objective on approaching the adapted’ solutions that don’t neces- be curtailed and categorized suitably ‘target date’. This in turn creates an sarily require giving up deliberating so that multi-asset class funds are not with System 1 but help individuals emotionally comfortable journey for mixed with standalone products, since investors. avoid the various pitfalls that can oc- most people fail to recognize the differ- cur when using System 1 to make in- ence between diversified funds and in- Finally, investments solutions should vestment decisions. One example of a dividual securities. Further simplifica- be professionally managed and mini- behaviorally adapted solution is auto- tion can be achieved by automatically mize the need for individuals to actively enrolment plans which has led to a sorting investment products to match monitor or review their investments to twofold increase in the percentage of the investment objectives based on ensure they are on track. Keeping the employees who enroll in a savings plan criteria that matter to individuals (for costs of these managed solutions low, (Madrian and Shea, 2000) and thus have example required return on investment, while allowing sufficient flexibility is emerged as an effective way to help liquidity, time-horizon), so that they key to ensure the uptake of managed individuals overcome inertia. There is better describe why an investment is solutions. Target date funds offer the scope, however, to develop such be- suitable. One way to do this is to pres- potential to lower the cost of offering haviorally adapted solutions further professionally managed solutions by by designing choice architectures and collectivising investors based on the products which make the transition ‘target date’ and thus achieving econo- from an investment objective to select- mies of scale both when negotiating ing an investment product as short (re- the price of underlying funds and cost duce cognitive load) and certain (reduce of trading activity. As importantly as the emotional strain) as possible. Such so- cost savings for savers is the creation of lutions would better engage consum- consistency: savers in each cohort ex- ers with investment decision making, perience the same time-weighted in- while designing out poor behavioral vestment returns thereby reducing the tendencies. likely dispersion of returns that a cohort

______TRUSTING N°7 – January/June 2015 99 INVESTING / Practical Investing

of savers would experience through an havior. On the other hand, clients strive goals? That is what goal based financial entirely self-directed approach. for robust simplicity, transparency and and investment planning is all about! good value. While these trends seem By refocusing on the process and on opposite, when correctly harnessed, clear set of rules, we might overcome Refocusing on core competencies one is actually enabling the other. And, our behavioral biases and become last but not least, both investors and smarter investors. By outsourcing ongoing asset alloca- the investment industry needs recon- ______tion to an outcome-oriented fund such sidering investment planning being a By Shweta Agarwal Ph.D. and Henry Cobbe, CFA, as a risk profiled or Target Date fund process instead of only ‘stock picking with contributions from Robert van Beek, CFP. for part or all of an investor’s portfolio, and making decisions on noise’. Asset © Elston Consulting 2015 All rights reserved No un- core competencies can be more clearly allocation is still key. Good investment authorised reproduction. articulated between advisers and cli- portfolios also start with the WHY. Why “Behavior Gap” and illustrations © 2015 Robert van ents. It enables advisers to focus more do we want to invest? What are our Beek. All Rights Reserved. on financial planning, and less on asset ______allocation whilst helping to design out References behavioral mistakes that investors and advisers can be susceptible to along the Benartzi, S., Thaler, R.H., 2001. Naive diversification strategies in defined contribution saving plans. Am. Econ. Rev. 79–98. investment journey. The need for lower cost solutions-type funds is pressing in Benartzi, S., Thaler, R.H., 2007. Heuristics and biases in retirement savings behavior. J. Econ. a time when advisory fees are increas- Perspect. 81–104. ingly under pressure, and performance Dalbar, Inc. & Lipper, 2010. Quantitative Analysis of Investor Behavior. Dalbar, Inc. & Lipper. under increasing scrutiny. Naturally, Grinold, R.C., Kahn, R.N., 1995. Active Portfolio Management: Quantitative Theory and Applic- selection of and due diligence on a suit- tions. Irwin Professional Publishing. able outcome-oriented fund remains Huberman, G., Jiang, W., 2006. Offering versus choice in 401 (k) plans: Equity exposure and key, but given the importance of asset number of funds. J. Finance 61, 763–801. allocation as the key driver of the level and variability of returns, it is essential Iyengar, S., Jiang, W., 2003. How more choices are demotivating: Impact of more options on 401 (k) investment. J. Pers. Soc. Psychol. that the asset allocation for a given objective is professionally managed. Iyengar, S.S., Lepper, M.R., 2000. When choice is demotivating: Can one desire too much of a good thing? J. Pers. Soc. Psychol. 79, 995. In summary, three trends mark the cur- Kahneman, D., 2011. Thinking, fast and slow. Macmillan. rent state of retail finance. On the one hand, the financial world and the prod- Kahneman, D., Tversky, A., 1979. Prospect Theory: An analysis of decision under risk. Economet- ucts created by it become more sophis- rica XLVII, 263–291. ticated ‘under the bonnet’ but simpler Madrian, B.C., Shea, D.F., 2000. The power of suggestion: Inertia in 401 (k) participation and sav- and easier for customers to understand, ings behavior. National bureau of economic research. whilst designing out detrimental be- continued on following page

______100 TRUSTING N°7 – January/June 2015 Practical Investing / INVESTING

______References ...cont’d Shefrin, H., Statman, M., 1985. The disposition to sell winners too early and ride losers too long: Theory and evidence. J. Finance 40, 777–790. Weber, M., Camerer, C.F., 1998. The disposition effect in securities trading: An experimental analysis. J. Econ. Behav. Organ. 33, 167–184. Zweig, J., 1998. Five investing lessons from America’s top pension fund. Money 27, 115–18. Carl, R., www.behaviorgap.com. The Behavior Gap, Simple ways to stop doing dumb things with money (2012, ISBN-13: 978-1591844648) and The One-Page Financial Plan: A Simple Way to Be Smart About Your Money (2015, ISBN-13: 978-1591847557)

Henry Cobbe, CFA Shweta Agarwal, Ph.D. Robert G.J. van Beek, CFP Henry Cobbe graduated with a first class Shweta Agarwal joined the Birthstar project Robert G.J. van Beek CFP® (1973) is a MA(Hons) degree from the University of in 2014 as a Behavioral Research Consultant. Financial Life Planner and Business Consul- Edinburgh and since 1999 has worked at She holds a Ph.D. in Decision Sciences from tant with a working experience of more than leading investment managers including the London School of Economics which was 20 years in the financial industry. He started Schroders plc, Thames River Capital LLP sponsored by the AXA Research Fund. Her his own company, About Life & Finance, in 2010 after working as business consul- and as a partner at Nevsky Capital LLP. research is on decisions under uncertainty tant, wealth planner, account manager and He is Managing Director and Head of and modelling behavioral conceptions of risk asset manager for different large and small Research at Elston Consulting which spe- management.Robert Shweta G.J. completed van an Beek MSc in financial companies. As author, in both the cialises in product development for asset Decision Sciences from the London School Netherlands and Belgium, Robert published managers and intermediary firms. of Economics in 2008 and a M.A.St in Math- 5 books (in Dutch for both consumers and ad- ematics from the University of Cambridge in visors) and a variety of articles about financial Henry is an IMC holder since 2000 and a 2006. From 2008 to 2013, Shweta worked planning, wealth management, investments, CFA charterholder since 2004. periodically as a Quantitative and Behavioral risk & return and financial literacy. His latest Finance Consultant at Barclays, conduct- project is a translation of the book and con- ing research for global strategic and tactical cept of The Behavior Gap© by Carl Richards. asset allocation models as well as building Robert is member of different professional bodies, serves the board of FPSB Nederland, wealth simulation and risk rating tools. Until FPA Belgium (Chair) and also represents 2012, Shweta was a Quantitative Analyst at Belgium and The Netherlands of Financial Decision Technology performing analysis for Planning Association (FPA USA) EAME In- market research projects. ternational Community and Geofocus group.

______TRUSTING N°7 – January/June 2015 101 INVESTING / Tax Corner

Avertissement pertinent sur une fiscalité excessive

Qu’est-ce qu’un impôt juste? Dans les systèmes progressifs actuels, qui posent un défi à l’égalité devant le droit, et face à l’appétit jamais rassasié d’Etats généralement surdimensionnés, la question revêt toute sa pertinence. C’est la raison pour laquelle l’Institut Libéral (Genève), en partenariat avec L’Agefi et avec le parrainage de la fondation Action Libérale, a lancé l’an dernier un concours d’essai pour étudiants basé sur la citation suivante du grand philosophe politique des Lumières Benjamin Constant: «L’excès des impôts conduit à la subversion de la justice.» Le jury du concours a décerné les prix de 3000 francs en espèces, assortis d’un abonnement à L’Agefi, à trois lauréats méritoires. Récipiendaire du premier prix, Amel Merabet met en évidence, dans ses considérations, les risques d’arbitraire qui découlent d’un Etat illimité, ainsi que la nécessité de protéger tant la liberté individuelle que la propriété privée en remettant en question les justifications souvent fumeuses en faveur des interventions Amel Merabet et des monopoles publics. Corporate Jurist Pierre Bessard [email protected] Directeur, membre du Conseil de fondation Amel Merabet, poursuit actuellement un Institut Libéral, Genève, Suisse master en droit économique à l’Université www.institutliberal.ch de Genève et un master en droit des affaires à l’Université Panthéon-Assas à Paris, dans le cadre du programme Swiss- * * * European Mobility. Elle a obtenu son bachelor en droit à Considérations d’Amel Merabet discrétion en prévenant, il y a deux siè- l’Université de Genève. lors de la remise du Prix à Genève, cles déjà: «l’excès des impôts conduit à le 30 septembre 2014. la subversion de la justice, à la détério- Parallèlement à ses études, elle s’est notam- ration de la morale, à la destruction de ment engagée dans l’encadrement péda- Parler des impôts c’est une gageure. la liberté individuelle». gogique d’étudiants et de professionnels Surtout lorsque l’exercice consiste à en difficulté d’apprentissage, en qualité de Concernant la destruction de la liberté relayer la grandeur de la pensée de répétitrice. individuelle, l’excès des impôts est ici Benjamin Constant, fidèle ennemi de perçu comme un excès du pouvoir, par Avec un intérêt prononcé pour la culture l’impôt excessif, sur un sujet d’écriture le truchement de la loi qui décide des et le désir de sensibilisation, d’accessibilité lui même imposé. impôts. Or, le rôle de la loi est précisé- et de valorisation des arts, Amel Merabet Pour dénoncer «le racket des impôts» ment d’empêcher les excès du pouvoir. a également été, pendant cinq ans, chargée certains brûleront aux yeux de tous et Si la valeur suprême dans la pensée d’exposition auprès de différents services aux trois-quarts un billet de 500 francs libérale est la liberté individuelle, com- culturels sur le canton de Genève. français. Benjamin Constant choisit la ment l’individu peut-il jouir de la liberté

______102 TRUSTING N°7 – January/June 2015 Tax Corner / INVESTING

individuelle si la loi, chargée de garan- Cela au mépris du droit de propriété - l’opportunité de la concurrence dans tir cette liberté contre les excès du pou- car puisqu’il y a excès des impôts, il y a les secteurs publics. Sans protection de voir, devient-elle même l’instrument spoliation légalisée – un droit de pro- la liberté individuelle et la garantie de la des excès du pouvoir? Aussi, comment priété qui est dans la pensée libérale propriété privée, l’individu contribuable jouir de la liberté individuelle si, con- l’émanation essentielle de la liberté se retrouve seul tel un empereur trahi crètement, l’argent des citoyens fonde individuelle. Plus nous pouvons pos- par son propre fils. Le fils adoptif est des initiatives étatiques plutôt que de séder, plus nous sommes libre. La «jus- ici incarné par le service public qui se rester dans la sphère individuelle - où tice sociale» est donc une parodie de jette sur le citoyen avant de le percer de chaque citoyen, qui connaît ses pro- justice, une subversion de la justice à vingt-trois coups (un coût pour les hôpi- pres besoins mieux que l’État, décide proprement parler: on ne possède pas taux, un coût pour les écoles, un autre lui-même comment utiliser son propre parce qu’on a travaillé, mais parce que pour les trains, les routes, l’agriculture, la argent? Un surplus d’impôts empêche l’État a décidé qu’il était juste que l’on santé, la culture, les sports, les loisirs…). donc la garantie de la liberté indivi- possède; la justice vient de l’arbitraire Et c’est à terre que l’on entend le citoy- duelle par la loi, et paralyse l’exercice de l’État, et non d’un ordre naturel - en soupirer une dernière fois dans son même de cette liberté par le citoyen: conforme avec le mérite et la morale agonie: toi aussi, mon fisc. cette liberté est donc détruite. - façonné par la somme du travail de Quant à la détérioration de la morale, chacun. la morale des individus ne saurait rest- Inéluctablement, Benjamin Con- er intègre dans un système où la loi stant avertit des trois dangers de s’oppose à la liberté individuelle. Le cit- l’impôt excessif et interroge à cet effet Amel Merabet oyen ne disposerait alors plus que de deux alternatives: soit il accepte cette loi entravant sa liberté individuelle et renie alors sa morale en devenant l’esclave d’un pouvoir injuste - l’esclave Depuis des années, la pression fiscale n’a cessé étant infâme, il ne connaît pas la mo- d’augmenter, alors que les déficits publics se rale puisqu’il ne connaît pas la liberté. creusent et que les défauts du système ne font Soit l’individu s’oppose à l’Etat, par les que s’aggraver. mots et par les armes, et la morale devi- Or la croissance continuelle des prélèvements ent simple facteur de trouble à l’ordre obligatoires et leur caractère de plus en plus public avec les empiètements sur la lib- arbitraire représentent la cause majeure des erté individuelle que provoque toute défaillances de l’économie et de la persistance du tentative de révolution. chômage en Europe. Enfin en ce qui concerne la subversion Progressivité de l’impôt sur le revenu, impôt sur de la justice, il faudra comprendre la la fortune, impôt sur les successions, fiscalité des justice dans son sens philosophique et entreprises, taxation du capital, financement de théologique classique. La justice, c’est la protection sociale: sur toutes ces questions rendre à chacun ce qui lui appartient. qui font plus que jamais débat, Pascal Salin livre, Or, si la loi spolie les citoyens, on voit avec sa clarté et sa rigueur habituelles, une vision bien que la justice est absente de la audacieuse pour en finir avec les «réformettes» loi puisqu’elle enlève au lieu de laisser électoralistes et les «mesurettes» qui prennent à chacun son dû - sauf à appeler cette aux uns pour donner aux autres. “La Tyrannie fiscale” justice «sociale». Pascal Salin est professeur émérite de l’Université de Pascal Salin Une justice sociale qui définit la jus- Paris-Dauphine, spécialiste de la théorie moné- tice comme la redevance à chacun de taire et ancien président de la Société du Mont- Odile Jacob, 2014, 331 pages, ce qu’il mérite en fonction de critères Pèlerin. Il est notamment membre du conseil ISBN: 978-2-738-13063-1 vagues et opaques qui ne reposent pas académique de l’Institut Libéral. sur la méritocratie du travail individuel.

______TRUSTING N°7 – January/June 2015 103 INVESTING / Tax Corner

The Sustainable Development Goals: What Can Be Learned from the Singapore Development Model?

The Singapore development model has Right after its independence in 1965, been widely-acclaimed for its ability to Singapore was aware of the need to springboard a nation from the Third create a huge pool of capital in order World to the First World – but arguably to fund the development of key infra- what exactly are the pivotal points to its structure in the country. success may not be well understood. Taxation as a tool was inflexible as a The Singapore model can be explained high tax rate is seemingly unattractive by two key principles – first, the unique- to foreign investment and immigrants. ness of the treatment of cash flows in So, a Singapore eager to attract invest- its fiscal policy and second, the concep- ments reduced tax rates gradually to tualisation of its economic and social one of the lowest in the world. But this, development policies. in theory, would mean that the funds But first a warning – that the adoption necessary for infrastructure develop- of the Singapore model needs to fulfil ment may also be reduced due to lower several criteria in order for it to be rep- tax revenues. licated for long-term success. Other- The Government would therefore have wise it may lead to certain undesirable to look for alternative funds domesti- outcomes. This will be discussed in the cally, or to look externally to borrow Leong Sze later part of this essay. from other countries or international organisations. Hian The Government did both, but with the An Alternative “Fiscal” Model? Leong is the Past President of the So- aim of reducing the reliance on exter- ciety of Financial Service Professionals, The fundamental difference between nal debt eventually. Singapore and other countries, and an alumnus of Harvard University, has what arguably allowed Singapore to Within less than 10 years, by the mid- authored 4 books (quoted over 1500 leapfrog its contemporaries – is a mi- 1970s, the Government was able to do so. times in the media), has been host of gration from a traditional tax-based Today, it has hardly any external debt a money radio show, a daily newspa- system towards a self-sufficient “sav- as almost the entire public debt is do- per column, Wharton Fellow, SEACeM ings-investment” model. mestic. Fellow, a Member on the CIFA Advi- sory Board, executive producer of the movie Ilo Ilo (21 international awards), and invited to speak more than 100 times in more than 25 countries on 5 The Singapore development model has been continents. “ He has served as Honorary Consul of widely-acclaimed for its ability to springboard a Jamaica and founding advisor to the Financial Planning Associations of nation from the Third World to the First World Brunei and Indonesia. ” He has 3 Masters, 2 Bachelors degrees and 13 professional qualifications.

______104 TRUSTING N°7 – January/June 2015 Tax Corner / INVESTING

An Alternative “Taxation” Model? The key to differentiating the Singa- The key to differentiating the Singapore model pore model with that of the traditional “ “high” tax-based system in other coun- with that of the traditional “high” tax-based sys- tries is that instead of a singular pool of tax revenue which is spent in a year with little left, a second constant pool tem in other countries is that instead of of funding is available for longer term objectives. a singular pool of tax revenue which is spent in Where a singular pool of tax revenue can result in the perpetual problem a year with little left, a second constant pool of of fiscal deficits, a secondary pool of funding which is not constantly sapped funding is available for longer term objectives. away may help to mitigate this issue. ” In Singapore’s case, this came from the people’s labour and mandatory contribution of their income into the CPF. In For a country with no natural resources and was also able to wean off interna- another country, it could be the discov- which could be exported and had diffi- tional funding and started to accumu- ery of oil, for example. culties attracting foreign capital invest- late annual Budget surpluses. ment at that time, where did the alter- From the late 1990s, the Government native funds come from domestically? also began to keep part of the annual The Singapore “Public Hous- By 1968, the Government recognised returns from the investment of the CPF ing” Model: Pricing is the Key that the social security pension funds funds to build up the country’s reserves. to Its Success? of Singaporeans, the Central Provident The reserves, at an estimated $900 bil- Fund (CPF) had accumulated a huge lion, are estimated to be the largest in Notably, one key use of the CPF in Sin- pool of funds. the world today on a per capita basis. gapore is to also fund the development of public housing, via the borrowing of The CPF was a self-generating pool of The above are arguably, one of the key it by the Government to fund the con- money, unlike taxes which would nor- reasons that made the Singapore mod- struction, and the borrowing of it from mally be used up year after year and el tick. the citizens’ own CPF accounts to fund in a time where Singapore was still an the purchase. under-developed nation, there was The use of a stable pool of pension hardly any surplus left over annually for funds thus enabled infrastructural de- By the early 1980s, more than 80 per development goals. velopment and economic growth. cent of the population were living in public housing. The decision was made to allow the In this scenario, a viable replication of Government to borrow and use the CPF the Singapore model would be for a However, after the 1985 economic refunds. The Government began pump- government to liaise with its citizens cession, several economists warned ing the CPF into infrastructure develop- to keep a small portion of the annual against further excessive usage of the ment, in public housing, airports, ports, returns of the pension funds, say 1 per CPF for the development of public etc. Arguably, Changi Airport (formerly cent – to fund development, so that the housing, as Singaporeans could then the world number one airport) and the route towards achieving development only use the CPF for the purchase of Port of Singapore (formerly the world goals may be smoother. public housing, other than for retire- number one port) were all financed to The pension contribution rates can be ment, as this could distort demand, some extent in the early years by the gradually adjusted upwards if desired, and lead to inflationary pressures and a CPF. to allow for more funds to be set aside housing bubble. By the mid-1970s, Singapore had man- in the pension fund, and this is argu- Eventually, the use of the CPF for pub- aged to build up its key infrastructure, ably easier to do than increasing taxes. lic housing did lead to escalating home

______TRUSTING N°7 – January/June 2015 105 INVESTING / Tax Corner

prices. The CPF thus became a double- ment adequacy are well-coordinated, it edge sword because of its dual use for may make the path to sustainable de- public housing and retirement. The velopment a smoother one. money funnelled towards paying for the increasing prices of the homes meant lesser funds for retirement. But the Singapore public housing model may still be adapted if public hous- Roy Ngerng & Leong Sze Hian ing is pegged on a “cost” basis instead of Singapore’s “market pricing” basis.

A different approach to attain- ing the Sustainable Develop- ment Goals? In conclusion, the Singapore model stands out in its identification of a sec- References ondary pool of domestically-available Roy Ngerng funds which could act as the jumpstart Linda Low, “Central Provident Fund in Sin- for infrastructural development, and gapore,” HKCER Letters, Vol.41, November Roy Ngerng is a sociopolitical blogger also continuing Budget surpluses and 1996, in Singapore. accumulated reserves for longer term http://www.hkcer.hku.hk/Letters/v41/rllow.htm use. He blogs at www.thehearttruths.com Edward Ng, “Central Provident Fund in which was the second most popular However, it bears repeating that for this Singapore: A Capital Market Boost or a sociopolitical blog in 2013. model to be effective, transparency Drag?,” A Study of Financial Markets, and accountability should act as strong Roy writes extensively on the coun- http://aric.adb.org/pdf/aem/external/finan- foundations, especially in the light of try’s pension funds and the Singapore cial_market/Sound_Practices/sing_cpf.pdf the issues related to using the citizens’ economic model. pension funds. Sock-Yong Phang, “The Singapore Model He has been invited to speak on Sin- Finally, a balance has to be maintained of Housing and the Welfare State,” Re- gapore’s tax, healthcare and education particularly for such a model, for as long search Collection School Of Economics, system. as wages, the contribution rates to the 2007, His blog has been viewed over 4 mil- pension fund, interest returns on the http://ink.library.smu.edu.sg/cgi/viewcon- lion times since it started two years pension fund to the citizens and retire- tent.cgi?article=1595&context=soe_research ago.

______106 TRUSTING N°7 – January/June 2015 Revue de bancassurﬁ nance sur le marché luxembourgeois

La revue dédiée aux derniers développements en matière de droit bancaire, fi nancier et des assurances au Luxembourg et dans les pays limitrophes ✓ Une approche pratique et scientifi que au travers d’analyses, de syn- thèses et de jurisprudence. « Votre concept tombe ✓ Le point sur l’infl uence de l’Union européenne. certainement dans le ✓ La seule revue à combler le besoin d’information dans ces matières. cadre de projets d’intérêt Le savoir et l’expérience d’un large réseau d’experts sous la houlette pour nous et je pense de Christophe Verdure, rédacteur en chef, avocat, docteur en droit, qu’il est également très chargé de cours associé à l’Université du Luxembourg, chargé de cours invité à l’UCL. intéressant pour le marché luxembourgeois. » Marco Caldana Quatre parutions par an. CEO Private Insurance Broker Abonnez-vous sans tarder sur Farad International shop.wolterskluwer.lu/RLB. Le prix de l’abonnement annuel (quatre numéros) est de € 292,60 TVAC (€ 257,80 HTVA). 15-2806-1

JN827tris-KLUW-RLBrevue-Adv209,90x292,81-A.indd 1 3/03/15 08:55 THE LIFE OF ASSOCIATIONS / Presentation of BZB - www.bzb.be

www.bzb.be

About BZB BZB is the professional association for self-employed banking and insurance intermediaries (Beroepsvereniging van Zelfstandige Bank- en verzekeringsbemiddelaars) in Dutch speaking Belgium. In 2014, it numbers more than 1,600 members of whom the vast majority is active as self-employed bank agents and insurance brokers. BZB also counts a group of insurance agents among its members, as well as several stock brokers and bank brokers. BZB represents their interests collectively and individually and strives for the continuation of the independent distribution channel in the financial sector.

INSURANCE: At the crossroads of change

According to a new survey conducted by Accenture and BZB (Pro- fessional Association of Independent Banking & Insurance Bro- kers) in Dutch speaking Belgium, brokers and agents remain the preferred insurance distribution channels for 81% of consumers because of the personalized service and advice they offer. For now, the place of the intermediary in the insurance ecosystem appears secure. But there are clear signs that change is on its way, with both the market and customers calling for a more integrated approach. For example, changing consumer behavior. The survey reveals that consumers are using digital and other direct channels more frequently. These include price comparison websites, which are gaining in popularity (used by 57% of respondents to look for new policies) and consumers are now more willing to purchase insurance online if certain conditions are met: a discount (61% of respondents), easy contact with one person (57%) and data security guarantees (48%). This is happening in a fragmented insurance market where new entrants, stiffer regulations, limited scalability, specialization and

continued on page 94

______108 TRUSTING N°7 – January/June 2015 Presentation of BZB - www.bzb.be / THE LIFE OF ASSOCIATIONS

In memoriam: Daniel Nicolaes (27/07/1962 - 11/06/2014)

To our great sorrow, on 11 June 2014 Daniel Nicolaes passed away at the age of 51. This year was Daniel’s 10th anniversary as Chairman of BZB, and he had been a member of management since 2001. Daniel gradually became an enthusiastic Chairman who left his mark on the association. He was a proponent of dialogue and turned the trade association into a valued discussion partner. Under his chairmanship, BZB was able to hold its head high when dealing with the banks and the sector in general. He succeeded in getting agents from the major banks to collectively join the association and also convinced other agents’ associations to collectively join. This in turn allowed BZB to grow into one of the largest representative associations. More- over, he highly valued professionalism and offering added value to members. Through his approach and growing expertise he gradually gained respect in the sector. And, because the European institutions play an important role in drafting financial legislation, Daniel also played a major role in building up a network at a European level. He had been a member of the Board of Direc- tors of the European Federation of Financial Advisers and Financial Intermediaries (FECIF) since 2013. The BZB conference was one of Daniel’s showpieces. From a small-scale happening it grew into a highly- valued and well-attended sectoral event. It was clear that he always wanted to have a conference featur- ing solid content. For him, this annual high point was proof that BZB had made its mark and that the association was a player to be reckoned with. Daniel also played a prominent role in lobbying in the context of important legislation impacting self- employed financial agents. For example, under his chairmanship BZB actively lobbied in the framework of the law on mediation in banking and investment services and more recently the Twin Peaks II legislation. Discussions with politicians, but also the FSMA, were an important part of his activities as Chair- man. At the European level, BZB took part in consultations on, and lobbied in the context of, MiFID, IMD, PRIPs, etc. under his impetus. He very recently engaged with various political parties during the federal election period in order to explain BZB’s political memorandum. He was also able to succeed where others had not in bridging the gap with the French-speaking trade association Fedafin. Thanks to good cooperation results were achieved in a number of matters, including the new joint committee. His will be some very large shoes to fill. Nevertheless, the BZB Board will ensure that future challenges are taken up with the same spirit and passion. He is greatly missed at BZB.

______TRUSTING N°7 – January/June 2015 109 THE LIFE OF ASSOCIATIONS / Presentation of BZB - www.bzb.be

continued from page 92 difficult access to capital are piling on intermediaries based on trust and available in combination with the ana- the challenges for brokers and agents the frequency of re-evaluation of lytics power of the insurance compa- who are under increasing pressure to their products. nies, brokers and agents will strengthen prove themselves relevant. Although — Embracing digital to use time more their value adding role and drive even the personal advice they offer is clearly efficiently and gain insights: Shrewd greater customer loyalty. This is the still a differentiator, they must use their investment in digital technologies win-win situation all parties should be time more efficiently if they want to re- and smarter use of existing digital working towards. tain and broaden their portfolios. channels can free up brokers and agents to focus more on personal The survey recommends two strate- ______advice and enable a faster turn gies: around of sales and even claims. About Accenture — Sharper customer segmentation: Accenture is a global management consult- At the same time, digital channels ing, technology services and outsourcing To further boost their personal- such as social media can provide company, with more than 305,000 people ized services, it is crucial for brokers serving clients in more than 120 countries. extra insights into their customers, Combining unparalleled experience, compre- and agents to choose the right ap- and by linking this data to the data hensive capabilities across all industries and proach for the right customer and business functions, and extensive research on of the insurance company, they can the world’s most successful companies, Ac- tailor their advice to meet their spe- create a 360° portrait. centure collaborates with clients to help them cific needs. The survey outlines four become high-performance businesses and governments. The company generated net loyalty segments among consumers By re-thinking the tools available to revenues of US$30.0 billion for the fiscal year on the Belgian market and explores them and by using all the different ended Aug. 31, 2014. their attitudes towards insurance channels (digital, omni-channel…) Its home page is www.accenture.com.

______110 TRUSTING N°7 – January/June 2015 Events Schedule / THE LIFE OF ASSOCIATIONS

mondo

un’iniziativa editoriale di ETF Consulting Gruppo MondoHedge Srl

INGRESSO GRATUITO  PER INFORMAZIONI: TEL 02.67382939  www.consulentia2015.it

______TRUSTING N°7 – January/June 2015 111 THE LIFE OF ASSOCIATIONS / Building Bridges between Professionals

Developing Cross-border Advice

Finance has been global ever since in this regard. To obtain and manage money has been used. such a special knowledge like that on However, what was once reserved for cross-border financial issues, advisors (Ultra) High Net Worth Individuals, a need access to the relevant pieces of rather small number of financiers and information and a network of compe- governments, became part of the daily tent financial professionals from differ- business. ent countries and regions. Globalization of retail finance and (col- The International Community of FPA lective) investment schemes added a (US) has added a new tone to the new challenge to the work of inde- sometimes less colorful palette of Euro- pendent financial advisors serving the pean cross-border venues. FPA is “the mass affluent. Mother of financial planning” (certainly in the US). The workshop taking place This is what cross-border financial ad- this year (immediately after the CIFA Fo- vice is referred to, especially important rum) in Antwerp is hosted by one of the to the European Union, where most Forum speakers, Robert van Beek CFP®, financial transactions are tied to the Director of FPA Belgium. Dr. Zoltan European Common Market (or global financial markets in some way -or an Another event of the European road- other). show has been the recent Budapest Luttenberger FP Forum in the summer, a semiannual Investments and Taxation are the most venue. During the event, top experts Zoltan Luttenberger PhD has been often affected fields of personal finance delivered insights about critical asset working in the FS industry since 1989 as (independent) financial planner, management and IT consultant. www.linkedin.com/in/luttenberger Zoltan Luttenberger PhD is a Founding Partner of the “European Transition Program in Financial Advice™” Zoltan Luttenberger PhD is Member of the Board (in charge of Interna- tional Relations) and the Founding Chairman of the Hungarian Associa- tion of Qualified Financial Planners. www.HAQFP.org He is also a member of the CIFA’s Executive Committee.

______112 TRUSTING N°7 – January/June 2015 Building Bridges between Professionals / THE LIFE OF ASSOCIATIONS

classes, product types and the challenges of the transition “from sales to advice” to master new markets, as well as the 2nd generation of the MiFID-IMD/ IDD regulations. We learned about FX robo strategies, private equity and IPOs in different industries and from different continents, the precious metal asset class and applied behavioral finance. However, the probably most useful part has been the special, patented know-how about managing client expectations, which is a very basic for investment advisors and DFMs. Within the EU, country specific regulations will make more flexible business models www.tinyurl.com/FPFBP14 available to German advisors, thus, opposed to their counterparts under commission ban or in a regulatory system without established rules for simplified advice. Another regular practice management http://www.vertriebsgipfel-tegernsee.de event took place in Bavaria, where senior officers of financial advisory businesses confer at the beginning of every year about the state of art of financial advice. This topic is going to be an exciting discussion in the coming years, when MiFID2 and IDD take effect in the EU. Zoltan Luttenberger, PhD

______TRUSTING N°7 – January/June 2015 113 UNIQUE ADVERTISEMENT OPPORTUNITY

Unique Advertisement Opportunity “TRUSTING, The Independent Financial Advisor” Attractive offer for the forthcoming TRUSTING N°8 – July-December 2015!

Half page: 1 500 euros (without VAT) Format: 210 x 146,5 mm

Full page: 2 800 euros (without VAT) Format: 210 x 293 mm

Presentation Distribution “TRUSTING, The Independent Financial Advisor” This issue will be widely distributed worldwide free of - published bi-annually by CIFA (www.cifango.org) charge, in particular to CIFA’s partner federations and in cooperation with FINARC SA (www.finarc.ch). associations, and at the United Nations’ ECOSOC, - designed to be an important communication tool for UNITAR, UNCTAD, FOSS, etc. IFAs in Europe and across the world. CIFA’s partner federations and associations CIFA regroups over 70 international professional TRUSTING covers all main action themes of CIFA, federations and national professional associations in such as: Europe, North America, South America, Oceania and - Harmonization of rules and regulation concerning Asia. CIFA represents over 750,000 individuals and/ the independent wealth management profession or legal entities involved worldwide in financial inter- - Comprehensive implementation of new rules and mediation. procedures imposed by authorities Via internet through the www.cifango.org website - Establishment of a code of conduct to fight repre- hensible practices “TRUSTING, The Independent Financial Advisor” - Education and certification of the IFAs’ profession at will be distributed to: Independent financial advisers, the international level. Banks, Regulatory authorities, Audit companies and HNWI around the world.

Contacts: Cosima F. Barone, Editor in Chief of “TRUSTING, Aurore Laugier, Partners and Donors’ Manager, The Independent Financial Advisor” CIFA (Convention of Independent Financial Advisors) Mobile: + 41 (0) 79 204 06 73 Mobile: +33 (0) 6 80 65 95 23 Email: [email protected] Email: [email protected] www.cifango.org

______114 TRUSTING N°7 – January/June 2015 CIFA’s PARTNER FEDERATIONS & ASSOCIATIONS

ASSOCIATIONS MEMBERS OF CIFA

ADVOCIS, Canada EFFP, Poland http://www.advocis.ca http://www.effp.pl AFG, France EFPA, Europe http://www.afg.asso.fr http://www.efpa-eu.org AFIZ, Czech Republic EFPA, Italy http://www.afiz.cz http://www.efpa-italia.it AFPA, Austria EFPA, Spain http://www.afpa.at/cms12/ http://www.efpa.es/efpa_espana AfW, Germany FECIF, Belgium http://www.afw-verband.de http://www.fecif.org AIF, Spain FEDAFIN, Belgium http://aif.es http://www.fedafin.be ALPP, Luxembourg FEIFA, Europe http://www.alpp.lu http://www.feifa.eu AMAF, Monaco Finanzplaner Forum, Germany http://www.amaf.mc http://www.finanzplaner-forum.eu ANACOFI, France FPA, USA http://www.anacofi.asso.fr http://www.fpanet.org ANAF, Spain FPSB, Indonesia http://www.anaf.es http://www.fpsbindonesia.net ANASF, Italy FPSB, USA http://www.anasf.it https://www.fpsb.org ANBIMA, Brazil GSCGI/SAIFA, Switzerland http://portal.anbima.com.br/Pages/home.aspx http://www.gscgi.ch ANCDGP, France HAQFP, Hungary http://www.ancdgp.net http://mptsz.org APFA, UK IFMA, Switzerland http://www.apfa.net http://www.ifma-net.ch APFIPP, Portugal IFP, UK http://www.apfipp.pt/index.aspx?MenuCode=bottomHomePage http://www.financialplanning.org.uk BVI, Germany LATIBEX, Spain http://www.bvi.de/start/ http://www.latibex.com/ing/mercado/Latibexadvantages.htm BZB, Belgium NAFSMA, Hong Kong http://www.bzb.be http://www.nafsma.net CAPS, Argentina Network financial planner e.V., Germany http://www.caps-financialplan.org.ar www.network-financial-planner.de CCEF, France ONIIP, France http://www.ccef.net http://www.oniip.fr CFSFA, Cyprus OVB, Slovakia http://www.cfsfa.org.cy http://www.ovb.sk CGPC, France PMAC, Canada http://www.cgpc.fr http://www.portfoliomanagement.org CIFPs, Canada SFAA, Switzerland https://www.cifps.ca/Public/default.aspx http://www.sfaa.ch/fr/welcome.asp CIFSA, Cyprus SFOA, Switzerland http://www.cifsa.org http://www.sfoa.org CISI, UK SFSP, Singapore http://www.cisi.org/bookmark/genericform.aspx?form=29848780&url=index http://sfsp.org.sg CNCEF, France SPAA, Australia http://www.cncef.org http://www.spaa.asn.au CNCFA, France USFCR, Czech Republic http://www.cncfa.fr http://www.usfcr.cz/cs/ CRT, USA VGF, Germany http://www.cauxroundtable.org http://www.vgf-online.de EFAMA, Belgium VOTUM, Germany http://www.efama.org/SitePages/Home.aspx http://www.votum-verband.de EFFAS, Belgium VV&A, Netherland http://effas.net http://www.vvenc.nl EFFP, Germany WMA, UK http://www.effp-online.de/front_content.php www.thewma.co.uk www.cifango.org

______TRUSTING N°7 – January/June 2015 115 CIFA 1st think tank specialized in reforming the financial system will organize its th 13 International Forum with the exceptional participation of Public debts, & deficits, unrestrained Matthieu Ricard taxation: who will pay? Buddhist monk, photographer and author H.E. Mr. Nassir from April 22nd to 24th 2015 Abdulaziz Al-Nasser UN High Representative for the Alliance of Hôtel Hermitage, Monaco Civilizations

What is CIFA? The founding principles of CIFA are built around an ethical reflection andthe reform of the worldwide financial system. Through its many assignments, CIFA is working towards a unique goal: putting finance back at the service of investors. CIFA is regrouping 70 professional associations, which represent more than one million individuals or legal entities involved in the financial intermediation worldwide. Since 2007, CIFA, through its active participation in the works of various United Nations organisms, has ob- tained the « special consultative status » with the United Nations in the framework of the Economic and Social Council (ECOSOC).

CIFA invites you to discover TRUSTING. TRUSTINGThe Independent Financial Advisor Published bi-annually, it contains important information on the various activities of CIFA, www.cifango.org €35 – N°5 – January/June 2014 such the annual Forum and about partner associations, as well as articles written by worldwide experts on management, investment, regulation and taxation. The new paradigm for You can download the 6th edition of the mag- Wealth Managers azine from: www.cifango.org White books about the previous Forums, both in English and French, are available for free download as well.

8 46 56 76

CIFA’s Forum in Monaco The UK advice market: KYC and AML ETFs: Reality vs Theory April 23-25, 2014 still in transition Adapt or Disappear in Singapore?