Regulations are meaningless without realistic proposals and intelligent enforcement.

I was recently in an economy middle seat as we prepared for takeoff. At the end of the routine safety tip announcements, the attendants pointed to the customary plastic sheet (like this one; picture slanted because the passenger to my right sneezed):

     The sheet also contains instructions on the proper forward-crouching position in case of emergency landings; it looks like this (guy on my left had an itch under his foot):

     I looked at the picture and then noticed how close my nose was to the back of the seat in front of me:

     I tried getting into the required position and soon realized I did not have enough space. I’m 5’4”, maybe, and weigh 128 pounds; in an emergency, I would have to devise my own safety procedures.
     With the trend moving to fit more passengers per square inch (ever had a dirty shoe from behind stuck right under your armpit?), could the solution be to install airbags in the back of each seat?

In the world of investing, one of the duties of any manager is to describe how investment vehicles work and what risks they carry. Yet, perhaps surprisingly, there are many tricks available to those who market creative products.
     For example, structured products. Good, bad or indifferent – that’s not the point here. If you have ever seen a presentation on the simplest of them then you must be familiar with payoff graphs that look like this (SP = Structured Product):

     On the surface, nothing to object to, with axes labeled correctly (horizontal: index price; vertical: payoff). The subtlety is in what is not shown: the dividends. Whereas they are included in the calculation of the return on the structured product (because they are used to decrease the cost of the structure), they are not included in the index value. Small potatoes? If the product has a tenor of 5 years and the dividend yield on the underlying index is 3% (cumulatively 15%, without dividend growth and compounding), then the corrected payoff looks like this:

     The relative cost of holding the note instead of the index rises substantially. You may still like the deal – beauty is always in the eyes of the beholder – but at least now you have a more realistic apples-to-apples comparison.

Price disclosure is another interesting area. The European rules in place far before MiFID II demand that client relationship managers disclose all costs and fees embedded in the portfolios of their clients. Yet in Italy I regularly find investors who have no idea of what they are paying for professional investment services. None.
     The perpetrators of this camouflage are principally three very fast-growing asset accumulators, firms with much national visibility, numerous laudatory articles (the financial press in Italy is notoriously partisan) and a well-inspired if oblivious sales force (who, despite being compensated on revenue generation, shows amazement when confronted with the cost estimates of their proposals).

Three cases. Three regulations. Three failures. Why bother?

Roberto Plaja 

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