Pension Risk Matters

Investment Best Practices Matters, Volume 1, Issue 3 - Now Posted

Susan Mangiero — Wed, 10 Mar 2010 00:45:05 -0500

Investment Governance, Inc. posts interviews with leading fiduciary liability insurance underwriters about risk management. Read an excerpt from an interview with Mr. Randy Schostag about hard-to-value investing. Learn about funding relief from Dr. Norman Ehrentreich.

Click to read the March 9, 2010 issue of Investment Best Practices Matters.

Click here to sign up for this complimentary weekly ezine about investment governance, due diligence and so much more.

Information Rights for Limited Partners Invested in Venture Capital

Susan Mangiero — Wed, 10 Mar 2010 00:24:04 -0500

Limited partners cannot make a meaningful assessment about the risks in their venture capital holdings without adequate access to information. Read what Investment Governance, Inc. Advisory Board member, Mr. Pascal Levensohn, has to say about transparency and due diligence. Click here to read Mr. Levensohn's impressive bio.

According to Mr. Pascal Levensohn, Section 17-305 (b) of the Delaware Revised Uniform Limited Partnership Act, which governs LP information rights according to DE law, specifically allows the GP to withhold from LPs “any information the GP reasonably believes to be in the nature of trade secrets or other information the disclosure of which the GP in good faith believes is not in the best interest of the Fund or could damage the Fund or its business or which the Fund is required by law or by agreement with a third party to keep confidential.” This would include the GP’s fiduciary duties and confidentiality obligations with respect to not disclosing portfolio company information without the consent of such company. The Act provides for a specific list of information that LPs are entitled to, and funds historically disclose that same information to their LPs—the top law firms in Silicon Valley model their LP agreement forms to be pretty consistent with Delaware law.

Specifically, Section 17-305 of the Act provides for the following:

(a) Each limited partner has the right, subject to such reasonable standards (including standards governing what information and documents are to be furnished, at what time and location and at whose expense) as may be set forth in the partnership agreement or otherwise established by the general partners, to obtain from the general partners from time to time upon reasonable demand for any purpose reasonably related to the limited partner’s interest as a limited partner:

(1) True and full information regarding the status of the business and financial condition of the limited partnership;

(2) Promptly after becoming available, a copy of the limited partnership’s federal, state and local income tax returns for each year;

(3) A current list of the name and last known business, residence or mailing address of each partner;

(4) A copy of any written partnership agreement and certificate of limited partnership and all amendments thereto, together with executed copies of any written powers of attorney pursuant to which the partnership agreement and any certificate and all amendments thereto have been executed;

(5) True and full information regarding the amount of cash and a description and statement of the agreed value of any other property or services contributed by each partner and which each partner has agreed to contribute in the future and the date on which each became a partner; and

(6) Other information regarding the affairs of the limited partnership as is just and reasonable.

The current state of the art for Agreements of Limited Partnership in venture capital allows the GP to override the information rights LPs have pursuant to the Delaware Revised Uniform Limited Partnership Act (the “Act”) as permitted pursuant to the Act and allows the GP to “adjust” identifying information given to the LPs in order to protect the identity of the Fund’s portfolio companies, which often is an issue in the case of Freedom of Information Act (FOIA) LPs. In addition, the partnership agreement allows the GP to restrict / withhold information from LPs if “the General Partner reasonably determines [such LP] cannot or will not adequately protect against the [improper] disclosure of confidential information, the disclosure of such information to a non-Partner likely would have a material adverse effect upon the Partnership, a Partner, or a Portfolio Company.” Other elements of the well drafted agreement do provide the LP’s with disclosure rights to their advisors, equity holders, etc. and provide remedies and protections to the GP with respect to GP withholding rights and improper LP information disclosure.

401(k) Fee Complaints Go Populist

Susan Mangiero — Sun, 07 Mar 2010 03:04:17 -0500

In reading "Earlier Retirement: Beating Back the High Fees" by Wall Street Journal reporter Eleanor Laise (March 6, 2010), I felt an immediate empathy for the subject of the article, Mr. Jeff Powelson. Apparently, this 401(k) plan participant lobbied his management hard to pay lower fees by replacing actively managed funds with index-tracking vehicles.

I am reminded by my own sorry experience with a "fully transparent" vendor a month ago, albeit a different product. Not having rented a car in many years, I okayed a $60+ per day fee to trek from a large Midwest airport to an important business meeting about 90 miles away. Our travel agent told me that it would cost $61 to rent a mid-size car for my colleague and me each day. I kept thinking how much we'd save by not having a van pick us up. Lo and behold when we arrived to sign the paperwork, quelle surprise! We were bombarded with hidden fees aplenty.

If I paid with my company credit card, my colleague could not drive without me paying a surcharge of $21 per day.
We could pre-pay for the gas at $2.98 per gallon or pay $7.98 per gallon the next day if we ran out of time to refuel before returning the car.
Insurance would cost us about $80 per day.
The use of a GPS device would be another $20 or $30.

A car that was supposed to cost less than $100 for our one-day excursion ended up costing about $220 with the various add-ons. More than the money, what upset me was that the car company would only let me view the numbers on an electronic screen and could not print out the contract and tally for me to review.

For those retirees (existing and prospective), fees deemed excessive, hidden and unfair are causing quite a stir. It's one thing to make a decision based on what you think is full information, only to discover that your wallet is being emptied quickly.

More complete disclosure is one answer though, as Ms. Laise points out, what does that exactly mean? Should fees be decomposed by type of expense such as "investment management, plan administration, transaction costs and other items?"

A few basis points may not seem like much but, compounded over the years, it adds up. Looking under the hood sounds right but assumes that the latch quickly gives away. If money managers and plan sponsors alike are reluctant to provide details, it will be tough going for individual savers. Also smaller companies that want to provide generous benefits may not have the negotiating power to move away from "retail" pricing. That said, the issue of fees hits home. Companies are likely going to have to move towards enhanced reporting or risk upsetting their workers who could possibly make a bee line for the exit door. When skilled and productive workers are hard to find, that outcome is far from optimal.

Investment Best Practices Matters, Volume 1, Issue 2 Published

Susan Mangiero — Thu, 04 Mar 2010 10:58:04 -0500

Investment Governance, Inc. announces added premium content to www.FiduciaryX.com about internal controls, service provider due diligence, hard-to-value investing and fiduciary assessments. Read an excerpt from an interview with Dr. Michael Kraten about enterprise risk management. Learn the difference between a principles-based approach versus a standards-based approach from Mr. Carlos Panksep.

Click to read the March 4, 2010 issue of Investment Best Practices Matters.

To sign up for this complimentary ezine, click here.

New Investment Best Practices Resources

Susan Mangiero — Sun, 28 Feb 2010 18:00:09 -0500

We are hugely excited to debut FiduciaryX.com, a unique knowledge-sharing platform for investment investors and their service providers. Two years in the making, we are continually busy at work, adding research, convenings with experts and new discussion forums to this multi-functional website.

If you want a demo, please call (203) 929-0011 or view our short FiduciaryX video tour.
If you think you or your colleagues qualify for a 90-day free trial, please email Sales@InvestmentGovernance.com.
If you want to sign up for our complimentary weekly ezine entitled Investment Best Practices Matters, click here.
If you would like to contribute content or blog, email Editors@InvestmentGovernance.com with your resume and topics of interest.

Click here to listen to me talk about FiduciaryX - what it is, why the website was created and who benefits. A transcript of this short video is provided below.

WHAT IS FIDUCIARYX? "Fiduciary X is a one-stop shop for information, research and analysis about investment best practices decision-making. It's a place where executives can get information about what the rest of the industry is doing, thought leadership on a variety of topics - asset allocation, investing in hedge funds, determining whether the fees paid to a money manager are prudent or not - and also be able to connect with peers."

WHY CREATE THIS WEBSITE? "It's a very scary time right now. Liability, both personal and professional, is soaring. People are paying higher insurance premiums. Lawsuits are skyrocketing. There are more rules and regulations than people can keep up with at this time. There's complexity in the investment world. There's market volatility. We've already seen that headline risk is a huge factor. People are very nervous about their jobs. We're trying to create - and we think we have succeeded with this website - a place that is safe for executives and their service providers to exchange ideas, to figure out what works and what doesn't work, to learn from past disasters and to do the very best job possible."

WHO BENEFITS FROM FIDUCIARYX? "We want to give recognition to the best in class leaders in the industry. The people who are doing everything right, who are taking a lot of extra steps to make sure that the decisions they make are comprehensive and carefully thought out. Right now the only people who get attention and a lot of press are the bad players. We need to learn from those individuals and organizations that are doing everything right on behalf of the ultimate individuals who pay the price for bad decisions."

Default Swaps Get the Credit

Susan Mangiero — Sun, 28 Feb 2010 15:45:57 -0500

In "It's Time for Swaps to Lose Their Swagger," New York Times reporter Gretchen Morgenson points the finger at regulators for not doing enough to stem the tide of moral hazard with respect to credit default swaps. While this superstar financial analyst rightly points out that risk transference continues to favor "high octane" traders and cost taxpayers and shareholders plenty, I don't agree that more "one size fits all" regulation is the answer. There is simply no evidence that a greater quantity of statutes will bridge the gap between risk management and reward. I don't have to be a behavioral expert to know that financial traders are motivated by the money they can make in a relatively short period of time. New rules beget changed incentives and often times perverse behavior. Does the law of unintended consequences ring a bell? Let's undo all the bad rules in place and focus on incentives that count. Start with bonuses that take into account the risk cost associated with expected return. Risk budgetize trading payouts.

If I'm playing by the rules, doing a great job of risk controls and acting in good faith on behalf of the proper constituencies, why should I be forced to pay for others' folly? Wouldn't my money and time be better spent on trying to encourage prudence on the part of industry participants, while informing the market at large how much my organization is doing right? For those who are in the vanguard of excellent risk management, take a bow. Get out the megaphones. Let the world know!

In December 1994, I was honored by the International Association of Financial Engineers with first place for my student paper presentation. Entitled "In Defence of a Free Financial Derivatives Market," I cite chapter and verse about why free markets trump. Though the statistics are fifteen years old, the philosophical and economic reasons remain valid to this day. I have listed a few tidbits below.

Compliance costs are high and divert precious resources away from shareholder wealth creation.
When buy-sell preferences are masked, it is difficult, sometimes impossible, to come to terms on a particular trade. The net result could be reduced volume which could lower liquidity.
Not all risks are equal and to treat them that way makes no sense.
Derivatives, used properly, can help to reduce risk.
Inovation is the lifeblood of economic growth. Regulation that is designed in the dark, away from public view, discourages problem-solving.
The right to contract with another party is part of free enterprise. Do you really want regulators to pick and choose your business partners?

This is not to say that the status quo works. Far from it, change is needed and fast. As a shareholder, I would like to know more about the risk management policies and procedures in place at all major financial services organizations, not to mention the knowledge and experience of their board members with respect to internal controls, leverage and complex securities trading. Disclose how changes are made to strategy and tactics and on what basis.

Let the sunshine in. Information is a great equalizer.

Investment Best Practices Experts Speak Out

Susan Mangiero — Mon, 22 Feb 2010 22:55:49 -0500

According to "Investment Best Practices Matters" (Volume 1, Issue 1, February 22, 2010) FiduciaryX.com subscribers will enjoy hearing from an array of industry luminaries in the next few weeks.

The list below is a sampler of the numerous value-added programs available to FiduciaryX.com subscribers at no additional charge:

Mr. Donald B. Trone, CEO - Fiduciary Ethos: Fiduciary Leadership
Dr. Michael Kraten, President - Enterprise Management Corporation: SAS 70 and Service Provider Due Diligence
Attorney Mitch Shames, Co-Founder - Harrison Fiduciary Group: Role of Independent Fiduciary
Dr. Robert Maurer, Director of Behavioral Sciences - Santa Monica-UCLA Medical Center: Crisis Management
Dr. Lucjan Orlowski, Professor of Economics - Sacred Heart University and Central Bank Consultant: Eurozone Monetary Policy and Investment Implications of Sovereign Default
Mr. Pascal Levensohn, Managing Partner - Levensohn Venture Partners: Venture Capital Governance and Key Person Risk
Attorney Timothy Selby, Partner - Alston & Bird, LLP: Hedge Fund Due Diligence and Hard to Value Challenges
Mr. Seth Merrin, CEO - Liquidnet Holdings: High Frequency Trading.

This debut issue of "Investment Best Practices Matters," published by Investment Governance, Inc. also includes an interview with Mr. Wayne Miller about career risk and fiduciary reform, along with tips as to securities lending risk assessment.

Click here to read this debut issue and here to register for a complimentary subscription.

Career Risk and Action: Chicken or the Egg?

Susan Mangiero — Mon, 22 Feb 2010 03:21:05 -0500

In a recent Virtual Town Hall about what governance means in the investment world, guest speaker Mr. Wayne Miller mentioned a relationship between career risk and fiduciary reform. Chairman Emeritus of Denali Fiduciary Management, Miller said that many people abide by the status quo, however ineffective, rather than innovate and improve their fiduciary practices. The fear is loss of one's job by taking prescription actions to better manage how monies are allocated and monitored. My response was to suggest the opposite. Why would a professional willingly adhere to bad practices when doing so could imperil his or her job and the related ability to get a bonus and/or promotion?

Which is the chicken and which is the egg? Does doing the right thing jeopardize one's climb up the career ladder or immensely help someone advance?

Click here to access the full transcript and enjoy all FiduciaryX subscriber benefits. If you think you qualify for a free 90-day trial as an institutional decision-maker, email Sales@InvestmentGovernance.com.

Complimentary Best Practices Newsletter

Susan Mangiero — Wed, 17 Feb 2010 23:27:39 -0500

The Investment Governance, Inc. editorial and research team is about to debut its weekly newsletter. If you would like a complimentary subscription to Investment Best Practices Matters^SM, click here to complete a short form.

We are beyond excited with our February and March 2010 array of programs and content offerings. If you want to join us as an expert contributor, email Editors@InvestmentGovernance.com.

The View From The Other Side - Regulatory Insight

Susan Mangiero — Tue, 16 Feb 2010 01:40:43 -0500

Sometimes seeing over the other side of the desk is difficult, if not impossible. That's too bad because regulators and those they oversee have a lot to learn from each other. This is especially true if you embrace a primary goal of ultimately allowing for complete self-governing as a way to ensure more efficient markets.

"Pension Funds' Risk-Management Framework: Regulation and Supervisory Oversight" by Fiona Stewart (Working Paper No. 11, International Organisation of Pension Supervisors, November 2009) gets us part of the way. This new compendium of rules and regulations categorizes pension risk rules for Australia, Brazil, Germany, Kenya, Mexico, Netherlands and the UK in four areas - "management oversight and culture, strategy and risk assessment, control systems and information, reporting and communication." An audit checklist that pension supervisors can use in their examination work is offered as an appendix as is a convenient summary table that lays out country-specific risk management regulations about things such as the role of the Chief Risk Officer.

The two sides of the fence may never shake hands but studies like this enhance the understanding as to what is expected of plan sponsors by regulators.

What is Investment Governance?

Susan Mangiero — Wed, 10 Feb 2010 22:44:39 -0500

What is pension governance? More broadly, how does one characterize investment governance? Talk to a dozen institutional investors and you are likely to get a dozen different answers.

Brian Holden has an interesting take on this important query. In "Where there's a will: governance check" (Pensions Week, January 11, 2010), his suggestions include the following:

Go beyond regulatory mandates to include best practices
Balance the representation of stakeholders
Add knowledgeable individuals to decision-making bodies
Introduce risk management principles to guide actions
Manage pensions with beneficiaries and shareholders in mind
Adopt a "dynamic and more businesslike approach"
Establish a governance code "to provide guidance and assessment."

A lot of this sounds eerily familiar. I've been making many of the same points for years as have others. Increasingly, dissonant voices are coming together to speak a common language of reform. This is encouraging indeed.

Yesterday marks the official launch of FiduciaryX.com. Click to read "Investment Governance, Inc. Announces the Launch of FiduciaryX.com." We will be announcing all sorts of events and speakers in the coming weeks and months. On February 16, 2010 from 11:00 AM to Noon EST, we are holding a FiduciaryX Virtual Town Hall on the topic of investment governance. Email CustomerCare@InvestmentGovernance.com if you are not yet a subscriber but would like to participate in this exciting online event. We hope you will join us.

Investment Governance, Inc. Announces the Launch of Best Practices Portal

Susan Mangiero — Tue, 09 Feb 2010 15:53:17 -0500

Investment Governance, Inc. today announced the official launch of FiduciaryX^SM – a new research, education, data and social network portal for institutional investors and their service providers. Over two years in the making, this exciting online resource enables 24/7 access to investment best practices insights from experts and peers.

Designed by and for buy side professionals who control over $25 trillion in global assets on behalf of pensions, endowments, foundations, sovereign wealth funds, mutual funds, 529 college plans and family offices, www.FiduciaryX.com offers executives a cost-effective way to improve decision-making, ask questions, search documents, exchange ideas and potentially mitigate personal and professional liability. Subscribers enjoy access to the FiduciaryX Virtual Reference Desk, Knowledgebase and Service Provider Ranking System, industry leader blogs, discussion forums, online town halls, documents archive and much more.

Be part of an ongoing conversation or carry out a quick search about topics such as reviewing an asset manager's performance, setting up a derivatives overlay program, choosing a new investment consultant, assessing 401(k) fees, implementing an operational audit, dealing with new performance reporting rules or purchasing fiduciary liability insurance.

“Our team of programmers, researchers, educators and experts are passionate about using technology to promote transparency, enhance governance and empower institutional investors and their attorneys, advisors, actuaries and other service providers” said Dr. Susan Mangiero, founder and CEO of Investment Governance, Inc. “It is a true honor to work with those individuals and organizations that continue to enthusiastically support our mission of codifying best practices and enabling stewards to gain clarity about the elements that comprise procedural prudence. The paradigm is undeniably shifting towards greater fiduciary responsibilities and disclosures for buyers and sellers of products and services alike. We believe that the launch of FiduciaryX provides a golden opportunity to showcase superb ideas and recognize industry leaders whose diligence reflects a high standard of care on behalf of underlying beneficiaries such as retirees.”

To learn more about FiduciaryX, visit http://www.fiduciaryx.com/video_tour, call (203) 929-0011 or email Press@InvestmentGovernance.com.

Qualified investment decision-makers who are willing to provide a few hours of their time over the next several months are invited to become part of the FiduciaryX User Group. In exchange, these individuals will receive a courtesy one-year subscription to www.FiduciaryX.com. Email CustomerCare@InvestmentGovernance.com for more information.

About Investment Governance, Inc.

Investment Governance, Inc. (formerly known as Pension Governance, Incorporated) is an independent research, analysis and training company. Our corporate mission is to empower institutional investors and their service providers with information and data that allows for improved decision-making with the fiduciary perspective in mind. Our services include consulting, conferences, communities, data analysis, training and benchmarking technology. Visit www.InvestmentGovernance.com, www.FiduciaryX.com and www.PensionRiskMatters.com for more information.

Leverage - I Love You, I Need You - Don't Hurt Me

Susan Mangiero — Mon, 08 Feb 2010 22:38:19 -0500

If institutional investors thought of leverage as a bouquet of daisies, they'd be playing "(S)he loves me, (S)he loves me not" and hoping to still be respected in the morning. Now that the worst economic recession of modern times might be abating somewhat, more than a few buy side executives are looking for a sweetheart to help them replenish diminished portfolio values. Let's just hope that the love affair is not fickle, causing more hurt than help.

In "Wall Street's New Flight to Risk" (February 15, 2010), Bloomberg BusinessWeek reporters Shanon D. Harrington, Pierre Paulden and Jody Shenn write that investors are on the prowl for yield. With over $150 billion allocated to U.S. bond funds, returns are low and the only way to add some excitement is with exotics such as "payment-in-kind" bonds that encourage the issuance of more debt than a borrower's operating cash flow would ordinarily support. Derivatives are another Valentine, with banks "again pushing" collateralized debt obligations ("CDO's) that can increase in value (depending on the trade) as defaults increase.

On January 27, 2010, Wall Street Journal reporter Craig Karmin writes that public pension funds are borrowing money to enhance returns rather than allocating to alternatives such as hedge funds and private equity pools. According to "Public Pensions Look at Leverage Strategy," funds can turn in a good performance with the use of leverage without having to resort to "volatile stocks" or illiquid assets. Others quoted in this recent piece suggest that risks exist and must be acknowledged.

Heartbreak hotel - here we come.

Call me crazy but a move towards leverage (possibly excessive) seems scary UNLESS and UNTIL asset managers and institutional investors alike can demonstrate that they know how to properly measure and manage. For every person who is asked to define investment leverage, the answer is seldom the same. AIMA Canada makes a good effort to add clarity to this important topic. See "An Overview of Leverage" (Strategy Paper Series Companion Document, October 2006, Number 4).

Does anyone have a good example of a risk management policy manual that expressly addresses how leverage is defined and managed accordingly? If so, please email Editors@InvestmentGovernance.com.

L'amour with leverage - how sweet it is, until it isn't. Then what?

Social Media Meets Institutional Investing as FiduciaryX

Susan Mangiero — Mon, 08 Feb 2010 00:10:10 -0500

According to "Survey: Social media wins followers" by Gregory Crawford (Pensions & Investments, February 8, 2010), institutional investors and their service providers will continue to embrace the marriage of technology and community building. The article reports that 324 respondents express a belief that social networks are likely to become an important part of the job, going forward.

As Investment Governance, Inc. founder and chief enthusiast for web-enabled best practices tools that deliver cost and time savings, I say "hooray." Why? About a week ago, we quietly launched a combination online library, Q&A clearinghouse and business network for institutional investors and their attorneys, advisors, actuaries, asset managers and other service providers. Check out http://www.fiduciaryx.com/video_tour for a short demo video.

We will soon issue a press release about all of the neat functions that comprise this exciting research and education website. I can't wait to tell you about all of the terrific experts we have at the ready to answer your questions!

If you are a buy side executive, I am inviting you to provide feedback about content and features. In exchange for a few hours of your time over the next several months, you will be given complimentary access to www.FiduciaryX.com for a period of one year.

FiduciaryX is owned and operated by Investment Governance, Inc. and has been designed for busy professionals who, like you, want: (a) independent, bias-free and actionable information on over 100 topics (b) the opportunity to share lessons learned (c) the ability to download document templates (d) a chance to ask questions of experts via the FiduciaryX Virtual Reference Desk (e) a way to search a comprehensive Service Provider Directory and rank vendors (f) the ability to connect with each other in a secure place and so much more.

Email CustomerCare@InvestmentGovernance.com or call (203) 929-0011 for more information.

Just a Spoonful of Sugar Makes the Medicine Go Down...

Susan Mangiero — Thu, 04 Feb 2010 00:46:04 -0500

Mary Poppins came to mind the other day during a panel discussion about governance and the role of the institutional investor.

Part of a conference about fiduciary obligations, I joined Mr. Stephen Davis (Executive Director of the Millstein Center for Corporate Governance & Performance - Yale School of Management) and Ms. Janice Hester-Amey (Portfolio Manager, Corporate Governance - CalSTRS) for a discussion about governance. I believe we were successful in kicking off the day long event with some thought-provoking tidbits. We covered new rules that, if passed into law, should empower pensions, endowments and other asset owners. We opined on regulation versus voluntary action. We had a lengthy exchange about what motivates institutions and whether governance was now considered a "must do" that contributes to return versus a "try to ignore" because it is seen as a drain on resources.

In the words of this famous nanny, find the fun and the job's a snap. I'm not sure that governance will ever top the list of jollies but one does wonder when best practices will stop getting lip service and instead merit the attention it so richly deserves. Chief Governance Officer anyone?

I added commentary about what I believe fervently is an inevitable industry move towards scoring with respect to process (not the same as outcome). Several legal professionals in the audience suggested that any type of benchmark would necessarily offer limited value because of subjective bias (their words, not mine) on the part of those who construct the ABC report card.

I don't necessarily concur. There are MANY points on which rational investment stewards would agree as no-brainer elements of what is right.

For those readers who want to get my specific take on what they are and how to monetize what I think is a great opportunity, contact me. Our firm is looking for solid partners on a few initiatives that we believe break the mold in anticipation of the brave new world of indexing procedural prudence.

Benchmarking the Investment Industry

Susan Mangiero — Sat, 30 Jan 2010 10:00:00 -0500

In my September 11, 2008 testimony before the ERISA Advisory Council, I described two buckets of organizations - those which deserve a gold star and those who don't. I went on to explain that the size of the "everybody else" bucket might be very large but that current reporting requirements make it nearly impossible to know about red flags in advance. This is cold comfort for shareholders and taxpayers who would prefer to know about financial runaway trains beforehand.

Unfortunately, those who attempt to provide more sunlight about their activities are not always rewarded. In a recent conversation with the CEO of a major asset management firm, I was told that this firm had provided detailed information about its fee structure to institutional clients. Instead of being rewarded, and because there are wide variations with report to how asset managers present performance data, sunlight led to storm clouds. Endowments, foundations and pensions responded by asking why the fees were so high. The reality was that the costs were in fact lower than those of comparable traders but, since competitors were not providing more than basic feedback, their costs were interpreted as lower and therefore "better." It's no surprise that the executive with whom I spoke expressed frustration. Here they were trying to do what they thought was the right thing and come clean with a detailed decomposition of what they charged. Instead of a reward, they were kicked in the proverbial shins.

In "Type-A-Plus Students Chafe at Grade Deflation" (January 29, 2010), New York Times reporter Lisa W. Foderaro describes a similar phenomena in the university sector. Where Princeton sought to minimize grade inflation by limiting the number of A's, top quality students found it harder to compete for jobs when graduates from other schools flashed their scores. Never mind that Princeton arguably tried to impart higher integrity data.

Is the message that transparency is window dressing and that no one really wants to have the low down on "true" outcomes? Alternatively, should we conclude that heightened disclosure rules are inevitable but it is incumbent upon providers of information to educate their recipients, i.e. make sure that underlying assumptions are clearly explained? If that does not occur, might well-intended parties (those who provide more detail than necessary) be impugned instead of rewarded for their forthrightness?

Editor's Note: Click to read "Testimony by Dr. Susan Mangiero to ERISA Advisory Council Working Group on Hard to Value Assets," September 11, 2008. (Note that Pension Governance, LLC is now part of Investment Governance, Inc.)

Wives and the Checkbook

Susan Mangiero — Mon, 25 Jan 2010 00:14:28 -0500

According to "New Economics of Marriage: The Rise of Wives" by Pew Research Center analysts Richard Fry and D'Vera Cohn (January 19, 2010), women are besting men "in education and earnings growth." Their statistics are noteworthy for countless reasons.

An observation that "marriage rates have declined for all adults since 1970 and gone down most sharply for the least educated men and women" suggests that those with degrees (and therefore statistically likely to earn more over their lifetime) are walking down the aisle.
For Americans between 30 to 44 years of age, there are more females than males with college degrees.
Three out of ten unmarried women with college degrees realize greater economic gains versus only fifteen percent of unmarried male who had gone on for higher education.
Household incomes grew for three out of ten married men with only a high school diploma. Less than two out of ten unmarried males with no college under their belts saw their checkbooks get bigger.
In both 1970 and 2007, 53 percent of survey-takers report that husbands and wives had the same level of education. In 2007, 28 percent of households declared that wives had more education versus 20% in 1970.
When the wife earns more money, only 21 percent of the respondent households claim the husband as the primary financial decision-maker versus 46% of situations where the Missus gets to choose. When the husband earns more, the number climbs to 35% in terms of final say on investments and purchases. In 36% of homes, the female better half decides.

In "She Works, They Are Happy" (New York Times, January 24, 2010), Tara Parker-Pope offers that divorce rates have dropped from 23 per 1,000 couples thirty years ago to 17 today, in part due to the ability for women to earn a living without help from a spouse. The result, she avers, is a change in how much time men spend on domestic chores and earning the bacon. While not yet an equal split, today's "to do list" at home is a far cry from the plaudits of Arlie Hochschild. In her still popular book, The Second Shift, this University of California - Berkeley sociology professor laments the imbalance between working men and women when it came to childcare and housework.

Demographic research about men, women and money always provokes thought and is great fodder for cocktail party chats. That's not all. The ramifications for individual financial planning, retirement plan policy-making and industry-wide sales and marketing efforts are immense. Women tend to live longer which necessitates a large enough piggy bank to pay bills over a longer period of time. Then there are all sorts of studies about how lifetime decisions are influenced by gender, age, education and income. Marketers cannot ignore the fact that their pitches must encompass the "who" and "how" of sales for IRA, mutual fund, annuities and insurance.

As the female earnings landscape is altered, office dynamics are not immune to change. In The Male Factor: The Unwritten Rules, Misperceptions, and Secret Beliefs of Men in the Workplace (December 2009), author Shaunti Feldhahn describes the results of a large-scale survey of men to better understand how they judge the opposite sex in a business environment. Not surprising perhaps, she finds that emotions and long-winded discussions (not getting to the point) are looked upon poorly by respondents. This begs the question - Will women change by being more like their male counterparts or will men learn to go with the flow and willingly accept communication differences? Will it depend on whether the boss wears a skirt or gets the coffee instead?

As always, your opinions count. Email Editors@InvestmentGovernance.com or add a comment to this post.

Editor's Notes:

Click to read the full report entitled "Women, Men and the New Economics of Marriage," published by the Pew Research Center, January 19, 2010.
Click to access life expectancy tables as provided by the U.S. Census Bureau from the 2010 Statistical Abstract.

Glass-Steagall Redux: A Gift to M&A Bankers?

Susan Mangiero — Sun, 24 Jan 2010 10:16:45 -0500

There are few things in business that are outright bad for everyone. Usually someone, somewhere is a winner when the rules change. In the case of proposed new bank regulations, merger and acquisition ("M&A") deal makers may be about to enjoy a bonanza.

On January 21, 2010, the White House issued a press release entitled "President Obama Calls for New Restrictions on Size and Scope of Financial Institutions to Rein in Excesses and Protect Taxpayers" in which the 44th U.S. President proposes to limit banks from owning a hedge fund or a private equity fund or "proprietary trading operations unrelated to serving customers for its own profit." Additionally, unfettered deposit-taking growth would be strictly curtailed in order to avoid another federal bailout on the basis of "too big to fail."

Another day, another mandate, another perverse outcome.

Risk transfer requires a willing party to accept the uncertainty that is anathema to someone else. Companies cannot hedge unwanted price risk if there is no one on the other side of the equation. Restrictions on proprietary trading, otherwise referred to as Volcker's Rule, could arguably (and significantly) depress liquidity in numerous financial markets around the rule.
Lumping all hedge funds into one category is a mistake. Some hedge fund portfolios are highly liquid, with net asset values being reported to investors every day. Forcing a "one size fits all" solution to a financial market sector that varies in terms of strategy, scope and risk factors is a recipe for disaster.
Private equity funds tend to adopt a longer view than a trading operation. Is the suggested federal grab for power meant to discourage this source of capital at the same time that bank credit is limited at best and cost-prohibitive at worst?
Why would Fannie Mae and Freddie Mac be exempt, especially given their stated track record in the area of risk-taking?

Not everyone is a sad sack. Think about all the equity carve outs and spin-offs that will result if banks are forced to shed their prop trading portfolios. This type of forced corporate restructuring will be a huge boon for investment banks, law firms and accountants who earn considerable fees for fairness opinions, buy-sell matchmaking and papering the deals.

Don't get me wrong. Excess in the trading room is bad news for everyone. Instead of binding limits introduced by regulators, why not encourage banks to increase capital reserves, evidence better risk management policies and procedures and let the market punish those organizations that get it wrong?

Perhaps not so coincidental, sales of Atlas Shrugged by Ayn Rand are skyrocketing. In its January 21, 2010 press release, the Ayn Rand Institute cites that more than seven million copies of this 1957 novel have been sold. The premise of this international best-selling book is that captains of industry who create wealth walk away from those who take, leaving the city of Gotham in the dark, unable to survive.

Law Degree, PhD or Gamer?

Susan Mangiero — Mon, 18 Jan 2010 00:28:22 -0500

When I was a doctoral student, there were invariable jokes about spending lots of time in school, only to find myself out on the street, competing with other PhDs to deliver pizza and otherwise under utilize what I had learned along the way.

Keep in mind that my situation is somewhat unique. I grew up in industry before I went back for my doctorate in finance with a minor in math. I had already worked over a dozen years on various trading desks. As a result, my objectives for higher education focused more on understanding the link between theory and practice. I was not disappointed. The experience has served me well in countless ways. I honed my abilities to model, test assumptions, ask questions and connect sometimes disparate dots. Time in the classroom at many levels (undergraduate, graduate, executive, professional) gave me a firsthand crack at realizing the importance of clear communication.

Unfortunately, not everyone is enjoying the graduate school experience. According to "Another Reason to Just Say No to a Ph.D." by Gabriela Montell (The Chronicle of Higher Education,January 14, 2010), real earnings for those with a professional or doctoral degree have dropped between 1999 and 2008. Taking a look at an article by Professor William Pannapacker who writes under the name of Thomas H. Benton ( "Graduate School in the Humanities: Just Don't Go, The Chronicle of Higher Education, January 2009), it strikes me that there is a great need to drill down into what the employment statistics truly mean.

Salaries in the arts may be depressed but those with deployable skills and experience for commercial endeavors such as finance and medical research have alternatives not available to everyone.
Some schools pay more than others. Refer to "Top 500 Ranked Universities for Highest FT Faculty Salaries."
Not surprisingly, compensation varies across disciplines. See "Faculty Median Salaries by Discipline and Rank (2006-07)" or "Murky Picture for Faculty Salaries" (Inside Higher Ed, January 17, 2010).
In "Business-School Professors Learn a Hard Lesson in Competition, Study Finds" by Peter Schmidt (The Chronicle of Higher Education, November 5, 2009), private universities tend to pay more than public organizations. Whether an academy is seeking accreditation is another factor with respect to the mix between research and teaching and the related size of one's total paycheck.
In "Harvard to offer first retirement plan for professors," Boston Globe writer Tracy Jan (December 3, 2009) 127 liberal arts, medical and education professors have been offered a chance to wind things stand in the form of a lighter teaching load, as a precursor to eventual cessation of their duties.
While some universities and colleges are scaling back, others are enjoying a boom in students. According to "College Enrollment Hits All-Time High, Fueled by Community College Surge," Pew Research Center's Richard Fry (October 29, 2009), two-year colleges are beneficiaries of fears about being sufficiently skilled to get work in today's intensely competitive workplace. Their tuition has risen at a relatively modest rate of 4.9 percent per year "beyond general inflation."

In the legal world, associates share the glum factor with those in the humanities. New York Times reporter Alex Williams writes that changed expectations are the reality these days. With bad economic times unduly impacting industries such as financial services, real estate and high tech, legal professionals are hard pressed to keep driving the fee train forward. In "No Longer Their Golden Ticket," Williams cites a survey by the New York City bar association that found that one out of every two attorney respondents were "seeking counseling from its lawyer-outreach program list" for mental health reasons.

Returning to my December 28, 2009 post, entitled "'Up in the Air' - Stark Reality About the Employee - Employer Relationship?". work is a four-letter word. If we stay current with sought after skills, there is a good chance that angst may not ever come to visit. MSNBC reports that accountants and compliance officers are likely to win the jobs growth lottery. That includes financial examiners, with projected growth of "more than 40 percent from 2008 to 2018." Complexity, added accounting rules and new government mandates could contribute to a rosy future for some. Click to read "Next hot job? Keepings on financial firms" (December 11, 2009). Interestingly, salaries for game programmers are not too shabby either.

Of course, besides the ability to earn a living, some posit that doing what one loves and enjoying it at the same time is a worthy notion. As a European colleague once said to me, "Americans live to work. We work to live." Love what we do and get paid for it as well? La Dolce Vita indeed!

Reading, Riting and the Rithmetics of College and University Salaries

Susan Mangiero — Sun, 17 Jan 2010 22:05:38 -0500

Not everyone is hurting when it comes to take home pay. According to "Ranks of millionaire college presidents up again" (Associated Press, November 2, 2009), higher education compensation toppled $1 million for "a record 23 presidents" with Rennselaer Polytechnic Institute ("RPI") and Suffolk University leading the way. Critics should be wary however if they think that life in the ivory tower offers a walk in the park or that numbers should be sliced downward. Recruiting experts suggest that good candidates are tough to find. Additionally, executives can add to a school's endowment which in turn impacts research projects, scholarships and renovations.

As much ado is made about how much people get paid, with the financial sector taking it on the chin big-time, consider the numerous factors that influence the nexus between supply and demand for a particular bundle of skills.