The Volcker Rule, proposed by the former Federal Reserve Board chairman and incorporated in the Dodd-Frank financial reform bill, is proving to be yet another problematic element of that massive piece of legislation, from the standpoints of regulators and the regulated alike.
The rule attempts to reduce the risk incurred by banks, by barring them from taking speculative positions in securities. However, it also offers exemptions for various hedging activities that are specifically designed to reduce risk. Additionally, it is being interpreted as permitting market making activities solely designed to accommodate client order flow. Regulators and regulated entities alike are encountering major headaches in, respectively, enforcing and adhering to the rule. Follow the link for details.
As mentioned in an earlier post, Merrill Lynch once had unfounded confidence in the potential for corporate incentive stock option plans to be a significant source of high net worth clients, and thus a major driver of asset growth and profitability. Many other securities firms are in the business of being corporate stock option plan administrators for similar reasons, but not necessarily because the business itself is especially attractive. In reality, this service typically is offered as a loss leader, offered to cement relationships with the companies offering such plans. Follow the links for details.
Meanwhile, sharp financial advisors and financial planners should understand the nuances of dealing with clients who have option grants pursuant to such programs. In particular, they should be familiar with the mechanics of option exercise and sell transactions, the most common action undertaken by option grantees once their holdings vest.
During my years at Merrill Lynch, I saw how the corporate budgeting department offered visibility and networking opportunities to its members. Indeed, its members typically rotated out to important positions elsewhere in the firm. If you are not familiar with the work of such groups, follow the link to gain a general appreciation thereof.
Additionally, you should familiarize yourself with the two principal approaches to budgeting and forecasting, the bottom up method and the top down method. Just note that these are not necessarily mutually exclusive. In fact, most companies apply a hybrid methodology that combines elements of both, such as by running the two processes in parallel, then reconciling the results into an internally consistent final product.
Lastly, a related issue is that of corporate travel expenses. In many companies, these can be a significant line item, and thus all sorts of rules and restrictions are set up to contain them. Unfortunately, some companies take a shortsighted approach that can be counterproductive in many respects. Follow the link to learn how.
One important, yet often overlooked, application of financial analysis skills is in evaluating employers. This applies to prospective and current employers alike. Follow the link for details.
Employers make a lot of overblown claims to entice new talent, and blow a lot of smoke at employees. These days, it's particularly likely that companies will make all sorts of assertions to justify efforts at extracting more effort and production in exchange for less remuneration. Sometimes it's a matter of necessity, sometimes not. By applying your analytic skills to the numbers that the company makes public, you often can separate fact from fiction. A related issue: future payoffs that prove to be far below expectations.
Note the similarities with forensic accounting. During my tour of duty in Big Four consulting, a forensic accounting engagement gave me highly useful training in deducing the big picture from scattered bits of data.
We continue to get a flood of comments, uniformly negative I might add, on a MetLife commercial called "Dad's Accident." How about those Liberty Mutual commercials? The ones with the droll narration by actor Paul Giamatti and the 1980s song "I'm Only Human" playing in the background? (Click here to see one version of this commercial.) How do these relate to you?
They show people doing a lot of careless, stupid things. Like flinging a car door open without looking and having it shorn off. (I can hear my late dad barking, "Look first, or someone'll take that door off on you!") Like parking on a steep hill without setting the parking brake. Like carelessly installing a window air conditioner and dropping it on a car below. (How funny would this be if someone were sitting inside, or if the air conditioner took out a passing pedestrian?) Or like (in another version of the ad) not noticing that the big tree branch you're cutting is hanging over your neighbor's parked car.
In general, these ads seem to have gotten positive reviews from media critics and the general public alike. They're humorous, and well-designed. The intent, apparently, is to signal that Liberty Mutual recognizes that even good customers sometimes do really ridiculous things and is willing to forgive the occasional big mistake. Does that make sense?
A contrarian view, expressed by a sharp-eyed friend, is that that Liberty Mutual is sending the wrong signals, perhaps inadvertently. In this person's interpretation, the company seems eager to insure extremely careless folks who generate big claims. Where does the money to pay those claims come from? Of course, from premiums paid by cautious people who don't have claims. Unintended message, according to this observer: if you're a good risk, avoid Liberty Mutual. Reason: you'll probably wind up paying higher premiums with them than you would elsewhere, in order to subsidize all the mishap-prone folks whom they seek to insure. Tell us what you think.
During 1984-85 I was in a project analysis group within the finance organization of AT&T Information Systems, a subsidiary created to spearhead AT&T's entry into unregulated markets after its divestiture of local telephone operating companies on 1/1/84. Our mission was to review the business cases associated with major new projects, and to recommend whether these proposals should proceed, be modified or be rejected. The longest-running analytic effort we had during that period concerned a proposed "shared services joint venture" with United Technologies.
In a nutshell, the project would be an alliance between AT&T and UT to package a variety of services to developers of office buildings. UT already had a firm foothold in this market with its Otis Elevator and Carrier Air Conditioner subsidiaries. AT&T would chip in its communications expertise, offering a common PBX (private branch exchange) phone system that would serve all tenants of a building, rather than trying to sell each its own PBX, a higher cost proposition for a given tenant.
The proposal drawn up by UT CEO Harry Gray and his team skewed the financial benefits towards UT. Nonetheless, the AT&T executive pushing this deal seemed undeterred. He found the prospect of doing a deal with the high-flying Gray to be rather glamorous. We in project analysis were in something of a quandary, since we had no authority to kill a project outright, only to make a negative recommendation. Our politically-savvy head grasped this fully, and thus was always loath to knock a project that was bound to go through anyway, no matter how questionable it was. Looking ahead towards his future advancement, he didn't want to alienate any executives who might be key allies in the future. His oft-voiced credo was, "I'm not stepping in front of a moving train."
The proposed joint venture with UT eventually died from delay, and the head of project analysis did indeed move on to bigger and better things. Nonetheless, this was an early lesson for me as an idealistic young guy who expected financial organizations to be independent watchdogs over the shareholders' purse: all too often they are not. Beware.
Postscript: for a thematically similar story, see the discussion of a joint venture between Merrill Lynch and IMG in our profile of super agent Mark McCormack.
Safeguarding the finances of elderly parents or other relatives is an increasing matter of concern for growing numbers of Americans, and thus also for their financial advisors and financial planners. The better practitioners are increasing their levels of expertise in this area. Follow the link for details.
Additionally, for wealthy elderly clients and their families, a growing number of banks, trust companies, family offices and private banking organizations are venturing outside their usual menu of services, by offering assistance and referrals concerning various pressing elder care issues. The link in the first paragraph also has details on this trend. This is a logical development in next generation finance aimed at increasing the odds that intergenerational wealth transfers do not result in asset flight to other firms, and making the younger generations more likely to consolidate their own assets at these firms.
Keep your eye out for people who claim to be experts, but are not. While I was in the high net worth marketing department at Merrill Lynch, my boss wanted to take control of a group that handled stock option programs for corporate executives. She was very impressed by the glib fellow who headed it, and she believed his assertion that this service brought many wealthy, profitable clients into the firm. However, this guy had failed for years to produce a convincing empirical analysis that justified his claims. He pressured me to do this for him, although it was not my responsibility. I did this only after my boss insisted.
I was suspicious of this fellow from day one. He was way too slick. He also claimed to teach economics to night students, yet he did not understand some very fundamental concepts from Economics 101. Specifically, he never heard of stock variables and flow variables. This man had to be a fraud.
Follow the links above for explanations of these concepts. Note that these concepts also pervade finance, though this terminology is not commonly used. Also, do not confuse stock variables with common stock.
I succeeded in analyzing the clients of the executive stock option department. The vast majority would do "exercise and sell" transactions (exercise the option to buy stock, then sell the shares immediately) and move the proceeds outside Merrill Lynch. In short, this business was adding nothing to the firm. The guy in charge was flabbergasted. Were he a real economist, he should have been able to construct the analysis that I did. But he wasn't. When I left the firm, he somehow was still hanging on. I had warned my boss about him, but she continued to be dazzled by his fast talking and breezy, self-confident style.
Project analysis can be an exciting field in itself, as well as a resume-enhancer than can position you for even bigger things in the future. Follow the link for details.
Meanwhile, you'd be well advised to do your homework before signing on to work with such a group. Depending on the company, its culture and its internal politics, you may not always be free to "call them as you see them," as the official rationale for such departments suggests. Instead, you might be subjected to intense political pressures. As a young project analyst at AT&T, one of the many frustrations with the job was that so many corporate decisions were made based on internal politics, rather than based on unbiased analysis.
So, I became a consultant with Touche Ross, naively expecting that clients hired us precisely to offer unbiased advice. To my horror, I soon learned that consultants are frequently hired with the tacit, but clear, understanding that they will deliver a predetermined set of recommendations. Management of client companies often seek political cover from consultants for their initiatives.
A related long-running issue is the independence of securities analysts on Wall Street. There is a clear conflict of interest when such analysts work for firms with investment banking divisions, or which offer group services to corporate employees, such as 401(k) plans. An analyst who offers a negative opinion on a company may be jeopardizing his/her firm's opportunities for doing business with that company. Not surprisingly, negative research opinions have long been relatively rare, even in down markets.
Several years ago, The Wall Street Journal (10/28/2010) reported on a case of direct retaliation against negative research opinions. After two analysts issued cautions about investing in Forest Laboratories, the company has refused to engage with them, ignoring their requests for information and comment.
How willing are you to compromise your opinions? If you are, how willing are you to take the fall if something goes sideways? Beware of landing in no-win situations.
Leading national retailers, most notoriously Target Stores, have been rocked by huge scandals involving inadequate data security. What implications does this have for jobs in finance and in financial firms? Potentially, a lot
Pursuant to extensive media coverage and a public outcry, Congress appears to be moving swiftly to mandate various measures against identity and data thievery, measures that will require increased investment in information technology and risk management regimes. While the financial services industry already is a major investor in these fields, the upshot of upcoming legislation is bound to be increased hiring related to data security. Follow the link for more details.