Posts Tagged ‘personal finance’

Amazon battles Walmart

Saturday, June 10th, 2017

The competition is different than you might expect, folks. There is a strong focus on finance, in addition to ecommerce.

The dominant US ecommerce company [Amazon] has been dabbling in lending for nearly six years, and has made $3bn in loans to some of the small businesses that sell through its online platform.

Now Amazon is substantially expanding its offer of instant loans and considering whether to provide other bank-like services. ….

The Seattle-based juggernaut also this week stepped up its battle with the world’s largest retailer, Walmart. Targeting the lower income customers that have long been Walmart’s bread and butter, Amazon said it would offer substantial discounts on its Prime membership programme to US shoppers who are on public assistance. ….

Over the short term, both initiatives sound like great news for consumers and small businesses. Amazon’s move into banking has already created new borrowing opportunities for businesses that had struggled to get bank loans. And its offer to low-income customers will give them more equal access to the benefits of the digital economy.

Brooke Masters, “Amazon’s quiet domination merits greater scrutiny“, Financial Times, 10 June 2017 (gated paywall).

Walmart Financial Services provides credit cards and other bank-like services, including cash transfers to Mexico and other countries, in addition to transfers within the United States and Canada.

deregulating sale of financial products

Sunday, February 5th, 2017

Here is a follow-up to an earlier post.

President Trump and his team are moving quickly to kill the “Fiduciary rule” intended to protect consumers from financial advisers who look after their own interest (commissions on sales) rather than the interest of their clients.

President Donald Trump has begun killing off an Obama-era retirement-savings rule unpopular with Republicans and some financial-industry executives who say it would harm consumers more than help…“We think it is a bad rule. It is a bad rule for consumers,” said White House National Economic Council Director Gary Cohn in an interview with The Wall Street Journal on Thursday. “This is like putting only healthy food on the menu, because unhealthy food tastes good but you still shouldn’t eat it because you might die younger.”

Lisa Beilfuss and Michael Wursthorn, “Trump Moves to Kill Off Obama’s Landmark Retirement Rule“, Wall Street Journal, 3 February 2017 (gated paywall).

This is NOT fake news, folks; nor is it satire.

Wall Street and the White House

Friday, February 3rd, 2017

The relationship between Wall Street and the White House is closer than ever. Donald Trump will soon begin to release Wall Street from controls that President Obama imposed on banks and financial advisers.

President Donald Trump is on Friday due to take his first steps towards undoing parts of the Dodd-Frank reforms that reshaped US banking in the aftermath of the financial crisis.

Mr Trump will also cheer financial professionals who offer retirement advice by directing his officials to consider scrapping a rule that orders them to act in the best interests of their clients, a senior White House official told the Wall Street Journal. [Emphasis added.]

Gary Cohn, the former Goldman Sachs executive who is now director of the White House’s National Economic Council, said Mr Trump would sign executive orders preparing the way to fulfil a campaign pledge to dismantle parts of Dodd-Frank. ….

The so-called “fiduciary rule” on retirement advice, which is in the White House’s crosshairs, has been the target of fierce lobbying by broker-dealers and other financial advisers since it was proposed by the Obama administration in 2015.

Although not yet in force, it will require them to recommend the best product for their clients, not just a suitable product. [Emphasis added.] ….

Steven Mnuchin, the hedge fund manager nominated to be Treasury secretary, has promised to “kill” parts of the [Dodd-Frank] law, including the Volcker rule, which put curbs on banks placing bets with their own money.

Barney Jopson, “Trump to take first step towards dismantling Dodd-Frank reforms“, Financial Times, 4 February 2017 (gated paywall).

reaction to guaranteed active management

Monday, January 9th, 2017

The FT letters section is becoming something of a blog. Last week reader Jason MacQueen promoted “guaranteed active management”, a scheme to guarantee investors a return higher than that offered by managers of passive funds. Fund managers would assume all of the downside risk and reap any upside rewards.

MacQueen’s letter drew a lengthy response from reader Jon Hay, who wrote (in part):

It is nice for any one fund manager to be able to claim that it has outperformed a benchmark. But it is quite wrong and misleading to cultivate the idea that investors should generally expect their managers to outperform. That is self-evidently impossible. That the average active manager underperforms the benchmark after costs is necessarily always true. ….

[F]und performance … often — even if it may underperform a benchmark — delivers capital growth and income in absolute terms. That can only be the true goal of fund management.

Jon Hay, “Benchmark obsession is a distraction from fund management’s true goal“, letter to the editor, Financial Times, 9 January 2017 (gated paywall).

Mr Hay is Corporate finance editor of GlobalCapital, a magazine published by London-based Euromoney Institutional Investor. His letter attracted not letters, but short comments from ‘HoundDog’ and ‘EconLarry’. The second pseudonym belongs to the writer of this blog (Thought du Jour). (more…)

guaranteed active management

Thursday, January 5th, 2017

Investors have been moving in droves from active to passive funds, i.e. from funds with high fees to those with low fees, from managers who promise higher than market returns to those who track some broad market index, such as the S&P 500, Russel 1000, FTSE 100 or Nikkei 225.

Critics point out that active managers, on average, perform no better than the market. After fees they perform much worse than the market, so investors are better off placing their savings with passive managers who charge lower fees. An added advantage of passive management is that the return will never be much worse than the index that the chosen fund is tracking.

FT reader Jason MacQueen has found a way to silence these critics. His solution is “guaranteed active management”. The manager places his own money in the fund, along with that of the client, and promises a return equal to the market (index) return plus, say, 0.5%. Instead of fees, the manager pockets all returns in excess of the guaranteed amount.

In short, the investor secures returns that are guaranteed to beat (by a fixed percentage) returns promised by passive funds. Moreover, all the downside risk is borne by the manager. How is this possible? Mr MacQueen explains. (more…)

rent or buy?

Friday, November 18th, 2016

I am often asked whether it is better to rent or to purchase a home. As I am an economist, friends assume that I have an answer. But, precisely because I am an economist, my response is usually “It depends”.

University of Oregon economist Tim Duy has drafted a very useful answer (It depends!) on his blog. I agree with his post, but would like to add a few points that are missing.


declining home ownership

Monday, November 7th, 2016

Washington Post columnist Catherine Rampell notes that US millenials (young people born between 1982 and 1994) are purchasing few homes compared to older generations. “Millennials want to buy houses”, writes Ms Rampell, “but they simply can’t afford to.” Indeed, they often cannot afford even to rent, so continue to live with their parents or move in with other relatives.

Ms Rampell does not see declining home ownership in itself as a problem. Indeed, she describes it as something we might celebrate.

The reasons behind this homeownership slide are certainly nothing to celebrate. But the slide itself might be.

We as a society tend to overvalue homeownership, at least from a financial perspective. Were it not for the psychic and sentimental benefits of homeownership, it’s otherwise hard to imagine financial advisers counseling their clients to dump all their savings into a single, giant, highly illiquid asset.

Especially one that, on average, shows such meager returns.

Over the past century, home prices have risen an average of about 0.6 percent per year, according to data from economist and Nobel laureate Robert J. Shiller. Investing in an index fund has, on average, far higher returns than owning, even after you take into account the costs of renting and the tax subsidies for buying.

For millennials, a mass lifestyle shift away from owning and toward either renting or crashing with relatives could be especially advantageous. That’s because buying a house not only locks up your savings; it also locks you, the owner, into a specific geographic location.

For workers who are just figuring out their careers … this seems especially wrongheaded. We want young workers to be mobile and to have as few frictions for job-hopping as possible.

Catherine Rampell, “Millennials aren’t buying homes. Good for them“, Washington Post, 22 August 2016.

HT Alphachat podcast of 4 November 2016 (free link), where Catherine Rampell discusses, with host Cardiff Garcia, her columns on shifting marriage trends and their potential significance.

I share Ms Ramplell’s view that home ownership is a poor investment; it is illiquid and promises poor returns compared to other investments. See, for example, my previous TdJ posts on the subject here, here, here and here.

Purchasing a home, even one paid almost entirely with borrowed money (a mortgage), is useful, though, in a way not mentioned in the column: the need to pay off a mortgage amounts to forced saving for retirement and old age. At least it used to be treated as forced saving. In the United States, for the past three decades homeowners have instead drawn on their equity, increasing their mortgage debt for spending on cars, furniture, holidays, all manner of consumer goods. Behavioural economist Richard Thaler explains how what used to be an accepted social norm changed so radically.

For decades people treated the money in their homes much like retirement savings; it was sacrosanct. In fact, in my parents’ generation, families strived to pay off their mortgages as quickly as possible, and as late as the early 1980s, people over sixty had little or no mortgage debt. in time this attitude began to shift in the United States, partly as an unintended side effect of a Reagan-era tax reform. Before this change, all interest paid, including the interest on automobile loans and credit cards, was tax deductible; after 1986 only home mortgage interest qualified for a deduction. this created an economic incentive for banks to use a home equity loan to finance the purchase of a car rather than a car loan, because the interest was often lower as well as being tax deductible. But the change eroded the social norm that home equity was sacrosanct.

Richard H. Thaler, Misbehaving: The Making of Behavioral Economics (Norton, 2015), p. 77.

investment advice for football pros

Saturday, October 29th, 2016

This is excellent advice for all of us!

Many footballers lose all their money after they retire. England’s Professional Footballers Association has estimated that 10 to 20 per cent of ex-players go bankrupt. This is something Raiola thinks about a lot. “Look, you now have players who can earn €50m to €200m [over their careers]. How do you invest that — or not? Players are always getting offers from people.” He puts on an overexcited young voice: “‘Mino, a friend of mine has a real estate company, and they’re going to do this, and I’ll get 14 per cent, guaranteed!’

“But you also have to watch out for banks. Banks want to sell you products too. I now have an [investment] portfolio for various players, which if you add it all up is worth about €900m. And we’re more conservative than conservative. I always say to players, ‘We do not invest.’ We just want the player to finish his career with the money he earned, and more — but not less. What I suggest is, ‘Buy your own house fast, buy bricks, and otherwise keep your money in the bank, even if it’s at low interest. You don’t have to live off the interest. Don’t put it into businesses you know nothing about.

“All my players, in the beginning, want a restaurant, a hotel or a café. I come from the restaurant business and I say, ‘Don’t come to me with that, zero. Because I know what that is.’”

Simon Kuper, “Mino Raiola: meet the super-agent behind Pogba and Ibrahimovic“, Financial Times Magazine, 29 October 2016 (metered paywall).

Carmine “Mino” Raiola (born 1967) is an Italian-born Dutch football agent. In his youth, he worked in his family’s Haarlem restaurant. At the same time, he completed high school and studied law (not business or finance!) for two years. At the age of 19, writes Mr Kuper, “he became a millionaire by buying a local McDonald’s and selling it to a property developer”.

Raiola currently resides in Monaco, speaks seven languages, and represents more than 20 well-known players from European leagues.

retirement savings (cartoon)

Monday, October 3rd, 2016

Consumers who save via pension are financially worse off than if they had invested the money themselves, according to new research.

FTfm: This week’s cartoon“, Fund Management, Financial Times, 3 October 2016 (metered paywall).

Details are provided in a column published last week:

Consumers who save via a pension fund are financially worse off than if they had invested the money themselves, according to new research. High fees, opaque commissions and taxes have been criticised for putting the retirement incomes of millions of European savers at risk. ….

Better Finance, the investor rights group that carried out the research, said … a direct investment — 50 per cent in equities and 50 per cent in euro bonds — at the turn of the century would have returned 105 per cent gross of fees and taxes, or 47 per cent in real terms. That is an average of 2.5 per cent a year.

In contrast, some French pension savers lost an average of 0.8 per cent a year since 2000, while those in Spain and Italy also experienced losses over the same period after accounting for inflation.

Attracta Mooney, “Value of saving via pension funds questioned”, Financial Times, 27 September 2016 (metered paywall).

Wells Fargo, bad bank

Tuesday, September 13th, 2016

This is an update to my September 8th post on this scandal.
A US government agency has fined Wells Fargo $185m for illegal practices. Wells, in turn, has fired more than 5,300 employees for malpractice. Top executives, meanwhile, keep their hefty bonuses, and in most cases their jobs.

Wells Fargo is facing calls to claw back bonuses paid to senior executives … as the fallout over its sham account scandal intensifies.

Two top institutional shareholders … have demanded answers over payments to Carrie Tolstedt, who headed the division where the episode took place. ….

Wells said in July that Ms Tolstedt, 56, was retiring …. She was paid $9.05m last year [including $6.5m in bonuses] ….

One large investor told the Financial Times that Wells should reclaim bonuses from the Wells executive, who has received at least $45m in total pay since 2011. ….

Bernie Sanders, the US senator who ran unsuccessfully for president this year, also weighed in, calling the pay for Ms Tolstedt a “disgrace”. ….

John Stumpf, chairman and chief executive, said when Ms Tolstedt’s departure was announced that she had been a “standard-bearer of our culture, a champion for our customers, and a role model for responsible, principled and inclusive leadership”.

Wells would not comment on the terms of Ms Tolstedt’s departure nor the investor complaints.

Alistair Gray and Stephen Foley, “Wells Fargo urged to clawback bonuses over fake accounts“, Financial Times, 12 September 2016 (metered paywall).

Breaking news on the subject:

US bank Wells Fargo is to scrap sales targets for staff in its branches, in an attempt to restore the faith of customers and investors in the wake of a “phantom account” scandal. ….

John Shrewsberry, the bank’s chief financial officer, pledged to “take a big, wide fresh look at who knew what and when” about the accounts and said a postmortem would take in employees at “all levels of the organisation”.

A tenth of the 5,300 workers that Wells had fired since the start of 2011 over the malpractice were “managers”, Mr Shrewsberry said. But, as he set out plans to change Wells’ business practices, he appeared to suggest the blame lay mainly with low-ranking, underperforming sales staff.

Alistair Gray, “Wells Fargo to scrap sales targets“,, 13 September 2016.

According to Fortune, Carrie Tolstedt, the Wells Fargo executive in charge of the unit where employees opened more than 2 million largely unauthorized customer accounts, retired over the summer with an exit package worth $124.6 million. [Emphasis added.]

Matthew J. Belvedere, “If ever there’s a case for clawbacks, Wells Fargo is it: Ex-FDIC chair“, CNBC News, 13 September 2016.