The Open Banking Revolution – Where Opportunity Lies, So Does Danger

            The world has moved at a furious pace. A few years ago, most people wouldn’t even want to log onto their own bank accounts online, let alone process payments over the Internet. Now the concept of walking into a bank branch to execute payment or writing and depositing cheques is almost an alien prospect. In fact, when you walk into a branch to process a payment over a certain amount, they most likely will get you to log onto your own online account and just ‘assist’ while you do it.

               Meanwhile most banks have their own ‘banking apps’ enabling you simple access to your account on your phone with entry just through the fingerprint identification on your iPhone. The degrees to which you can perform financial actions will depend on the bank, but at your fingertips on the train to work is the prospect to pay bills, view balances and set up direct debits and standing orders. In our increasingly hyperactive lives the ability to use a spare second to carry out actions which previously required taking time to walk to a physical bank branch is welcome relief. 

                 Additionally, smartphones for several years now have enabled us to make payments using our phones using fingerprint or facial recognition. No longer do we not need to carry much cash, if any, and we now may not even need to carry a wallet at all. Just a phone (and a charger!). Financial decisions and actions are becoming increasingly easy to carry out. You may be forgiven for wondering how much more innovation could improve things. 

But all the above was before ‘Open Banking’ came in. 

Further Details Around Open Banking can be found at https://www.openbanking.org.uk/

           Open Banking was regulation (which came into force in early 2018 in the UK and EU) that required banks to open up their platforms to 3rd party applications ‘safely’. As such it was no longer only each individual bank which was going to be able to provide you digital access to your account and its data. 3rd party ‘fintech’ developers could create applications which hook into each bank’s own API which, with the customer’s permission, would allow you to view details of your account in a separate tool to your Bank’s app, one potentially giving you far more flexibility than that of the bank’s application itself. 

                 The tools developed from it have enabled you to analyse your income and spending on a given account, helping you to bucket expenditure into different categories making it easier than ever to do that budgeting we all find painful to do. Gone were the large excel spreadsheets where you had to download all your account statements to, and attempting to figure out individual payments and the category it should go into. Now you could allocate a given payment to a particular category and your open Banking app will forever allocate similar payments into its given category, allowing you to slice and dice your income & expenditure into different graphs and tables to help you better understand why you’re not saving as much as you thought you should be. 

          But it’s more than that. Because the apps are independent from the financial institutions providing the banking services, they offer the opportunity to connect up to all bank accounts you may have. Suddenly whereas previously you had log into each of your individual accounts with the providers you banked with, now you could view all your accounts in one place - savings and current. Getting an overall view of your finances had never been easier. 

          Separately, whilst not specifically from open banking, other applications began offering services which allowed for an auto allocation of some of your income into a savings account, encouraging generations millennial and Y to save by doing it for them. Some of these worked by using what you spent on a cup of coffee, and putting the change into some form of savings account. That spare change that often got frittered away on nothing was suddenly being used to save for future, sometimes just 25p at a time. 

            As the apps develop and the major financial institutions become forced to provide access, the opportunities it opens up for consumers also increases. Suddenly there is the possibility of being easily able to switch money between accounts, or choose from which account you wish to make a payment from all of them in the one location. The ability to move money around your existing accounts could enable you to optimise the amount you receive on your savings by ensuring you have the majority of your money sitting in the highest earning account at any given time without the need to log into multiple apps or accounts to move it, something which puts off so many people from managing their cash savings effectively. 

             But it has the potential to be so much more than that, a one stop shop for all your financial needs. The opportunity is there for algorithms to be created for the account holder to automatically allocate their savings to the highest interest bearing account, or shift money off a credit card to the one with the best rate ensuring any cash balances for which you get charged interest would be minimised as soon as it appeared. What if not just your bank accounts were connected, but also all your investment platforms – pensions, ISAs, NS&I accounts, share holdings and other investment vehicles – were all not just accessible in the one place, but where you could, despite your provider, shift resources between them in one place. Robo-advisers could not only be programmed to allocate cash between the funds it feels are best placed, but also the money you wish to stay in cash, could be moved to an account with a better savings rate the moment it became available. With the inclusion of a standardised KYC (Know Your Client) across all banks under the same or linked regulatory bodies, there is no reason why automatic account setup couldn’t be done based on information already used to set up accounts in the past. The list of potential for customers is immense, many of whom suffer currently because of the hassles of moving savings accounts or not noticing when the rate they’re getting is much worse than when they signed up for it.

             With every new innovation comes the potential dangers associated with it. Fraud, and especially cyber fraud and theft are increasing year on year. As we move to a more digital society, criminals are looking for more ways in which they can take advantage, be it via identity theft and setting up accounts in your name to accumulate huge debts with, or through direct theft from your accounts by getting access to your account or convincing you to transfer money to an incorrect account than you intended. Push payment fraud alone last year in the UK resulted in £354m of people’s and businesses’ money being tricked into transferring to a wrong account. One such fraud involves criminals sending an email pretending to be your conveyancer at the time of house completion and inserting their account details for the solicitors. While this fraud falls into the more basic category of persuading you to transfer money to a fraudulent account, the bigger risk with the new apps will come through the ever more complex methods by which hackers seek to steal the details of your account to divert funds to themselves. 

            The regulations applied by the Financial Conduct Authority (FCA), and similar European authorities via PSD2, are supposed to mean that your details (security details, login etc.) remain on the bank’s database itself, and that apps have no access to your security details. But if hackers were to gain access to just an app itself which enabled the transferring, payment or setting up of new accounts then there could be a risk they wouldn’t need your individual account details. Many of us are extremely lax when it comes to protecting our own cyber identities, working on the assumption that the institutions providing us with the services have adequate security in place to protect us from all eventualities. Simultaneously we bemoan increased security features which make things increasingly difficult for us to access or do simple items in our own accounts, with attempts to make passwords increasingly more complex one such feature which tests our memories and patience to the limit. As the speed of innovation shows no signs of abating, and the pressure remains on financial institutions to accommodate their clients at the same speed, there is a risk that the servicing of these new Open Banking apps may come at a greater speed than their ability to protect clients from inventive new cyber fraud.

            Additional questions arise over the use of the data consumed by the 3^rd party applications. As with all digital products these days, many companies seek to use the data that flow through their applications for a variety of purposes. Big data is big business and the ability to have millions of financial transactions flowing through your application opens up additional doors for the fintech to build on the data itself for additional revenues. Be it for the use of targeted advertising of financial or commercial products to users, or of allowing marketing companies a deep dive into the data to better understand consumer or saver behaviour, having reams of financial data on tap is where the real benefit lies for the app providers.  Whilst anonymising the data is an obvious first step to help make users feel secure, one suspects more will need to be done to make people fully trust that their data won’t be misused. The Facebook/Cambridge Analytica scandal is still fresh in people’s minds  and any kind of similar scandal with financial data could delay the progression of such applications by years.

          A final consideration is the potential impact on financial institutions themselves. As they seek to keep pace with the 3^rd party applications on offer, it is possible, with their initial larger resources, they may seek to push their own applications to the forefront. Whilst this could promote better quality of apps, and also apps with much better security, it may also be less beneficial for consumers. An app promoted by one financial institution, whilst it could provide the same services in terms of access to all accounts from any other institution, it may also seek to promote its own accounts and investments above others, which may not be in the best interest of the consumer. Additionally there’s the potential impact on the ability of banks to offer good rates for the same amount of time they currently do. In the current climate, banks often offer new “attractive” savings rates to bring customers onto their books. Many of these offers stand only for a limited period until a certain number of customers have signed up, after which it no longer becomes viable to offer such an attractive interest rate to more clients. In some cases these offers may last for only several months or even weeks. In a situation where applications are using AI to determine the best account for savers and automatically moving thousands of client’s money from the previous better account to the new “star” account, these offers may only last a matter of minutes, never mind months. Separately an inadvertent bank run could be a possibility if some banks’ least attractive accounts are suddenly drained by robo investors switching the money from these accounts to those offering a better rate. If this were to take place in great enough numbers, the speed and size of the withdrawals could put smaller banks liquidity at risk.

          There’s many exciting potential benefits which are likely to occur from the shift to open banking. As with everything we’ve seen so far in the ongoing digital revolution, there is likely to be applications to this new era in accessing our own financial data the likes of which we won’t even have contemplated yet. The trick as always, will be to ensure that we balance that ever growing wish for greater financial flexibility with the increasing need for thorough and safe financial cyber security.

I'd be interested to hear your thoughts on the opportunities and risks of Open Banking:

• Any thoughts on what sort of features would like to have in an app that would better help to manage your finances?
• Would you be open to a robo-investor moving your money around and opening new accounts based on preferences you may have selected?
• What concerns you most about the access to information that 3rd party apps may have and the risk to you?

Short Sellers and the Downfall of Woodford

“Greed is Good”, the famous utterance of the fictional Corporate Raider Gordon Gekko in the 1987 film Wall Street. 

“Past Performance is not an indicator of future returns” - the warning message on almost every advert for an investment fund, or “Caveat Emptor” as the Romans would have told us. 

The warnings we’re always told should stoke appropriate research and caution but the want for a “better than average return” so often drives our greed to take advantage before we’re too late to the party. 

And so to Neil Woodford and Woodford Investments and the suspension of withdrawals from his OEIC (Open Ended Investment Company) the Woodford Equity Income Fund and its impact on his listed fund vehicle, the Woodford Patient Capital Trust. A star fund manager known for stellar returns for decades attempting to stop the rot from poor performing investments and the knock on effect of withdrawals forcing him to sell down on his more liquid holdings. I’ve been fascinated with this story, since it came to light a couple of months ago that his fund had begun to get into trouble and that the allocation of non-liquid small cap and unlisted assets was starting to rival his more liquid holdings. 

There’s so many takeaways to be had from this ongoing story:

• Woodford, once viewed as Britain’s answer to Warren Buffett, showing fallibility the Sage of Omaha has never come close to, as his fund is forced to suspend redemptions for fear of being unable to honour those redemptions without closing the fund down completely. 


• How the speed and size at which investors were looking to redeem their money from the fund forced him the sell down his larger cap, more liquid holdings reallocating his portfolio to be made of more illiquid or entirely illiquid stocks effectively changing his overall strategy and making it harder to keep up with the increasing number of redemptions, including Kent County Council’s final blow of wishing to pull its entire £263m which led to the suspension. 


• How Woodford took sizeable holdings in relatively early stage companies (which couldn’t easily be disposed of) in the estimation that some of these would come good when their ‘unique’ product came to market and he could take advantage by making money from of a main market listing. Did his investors really know what his fund’s aim was about? Do most retail investors ever really pay close attention to what a ‘star name’s’ fund is doing or do they just assume it will make them money?


• Or how he avoided breaking the requirement to only hold a certain number of unlisted stocks by listing some of his private holdings on the almost completely illiquid Guernsey stock exchange and entering into an asset swap with his Patient Capital Fund to buy himself some time. This asset swap which gave the Equity Income Fund shares in the Patient Fund in return for some of those illiquid holdings, indelibly linking the fates of the 2 funds even closer together, as when Woodford would be forced to sell down on his Income Fund assets for the redemptions to investors, the Patient Fund itself would now be 1 of those assets, driving its price even further down. 

However the story I want to follow is the ensuing battle now taking place with those seeking to bring him down further and the knock on impact on the companies he sought to invest in.  

A few days after the suspension of the fund came the news that hedge funds were targeting his investments (#link to Times article) by short selling all his holdings based on the list of stocks the Woodford Funds held, which was published on its own website. In the knowledge that Woodford would be forced to sell these stocks to get back on track, hedge funds sought to drive the value of those assets even lower by selling them ‘short’, meaning that when Woodford tries to sell his significantly sized holdings, especially the more illiquid stocks, he would only be able to do so at an even more depressed price, putting his funds (and investors) in an even more perilous place, effectively pushing him closer to the shutdown he is trying to stave off. But of course this short selling also had an adverse impact on the stocks he held, many of which did little more wrong than to be a holding of a fund forced into a fire sale. Woodford in response has now changed his website to only disclose the top 10 shares in each fund, to prevent any such attack from escalating. 

So how is this possible?

Going short on a stock, effectively means for an investor (bank, hedge fund or individual) to sell a share which they don’t own.

How can you sell something you don’t own? You borrow it.

Confused?

Imagine an investor might believe a particular stock is significantly overvalued. If he doesn’t own it, in theory he can’t sell it to realise a profit. But the market does let him sell shares into the market at the current value so long as he delivers the shares on time. He is obligated to deliver those shares to the buyer in 2 days time (the date of settlement), or risk defaulting on those obligations and be sued/fined. In order to ‘cover the short’ he can borrow the shares from someone that owns them and use these to settle on the shares he shorted.

In return for borrowing the shares, the investor pays the owner of the shares a fee for every day the borrow is in place. Eventually when the investor feels that the share price has fallen enough (or he needs to close out his position) he will buy back the shares in the market and return them to whoever he borrowed them from. If the price has fallen over that time, then then he makes a profit based on the difference between the price he shorted the shares at and the cost of buying them back, less the cost of borrowing the shares. If the lender of the shares wishes to get his shares back at any point then the borrower of the shares will either have to buy the shares back in the market to return them, or find someone else to borrow them from. 

So why would anyone be willing to lend their shares for this purpose? There might be several reasons. For example if you’re a long term shareholder, you might just be sitting on the shares and getting a capital appreciation/depreciation as the share price rises and falls, in addition to any dividends. By lending some of the shares out over a period of time, you still remain the ultimate owner of the shares but benefit from additional funding in the charge you make from lending them. This can act as an additional form of revenue from the shares, although you would want the shares back for the purpose of voting rights or dividends should they be required.  Another reason might be a bank which for the purpose of risk management sits long on shares of a given company across its trading books. Similar to how a bank would use cash deposits it receives in to lend out, a bank would want to lend out any stock holdings it’s sitting on to squeeze any additional income it possibly can from the holdings. 

The practice of short selling itself dates back almost as long as the earliest stock markets, with records showing an early 17th century investor attempting to assert pressure on the Dutch East India company by shorting its shares and demanding a greater share of its profits. Many Hedge Funds have long made a success from trying to short stocks which they see as having a poor business model and being overvalued. They look to profit from what they believe to be the imminent fall in the price, once the market realises a correction is due, all the while hoping that any initial uptick is short lived. But some hedge funds have attempted to take large short positions in companies to force their share price down whilst simultaneously speaking out about what they perceive to be bad practices or signs of future downturn or demise, which if other market participants take heed, could itself lead to a downturn in the price creating profit for the hedge fund. A potential self-fulfilling prophesy which, unless the rumours are something the shorted company can clearly disprove, can easily gather a downward momentum forcing that company itself into difficulties if it causes investors, creditors or customers to withdraw their support.   

There’s many famous examples of hedge funds exerting such pressure, none more so than during the 2008 financial crisis. There first Bear Sterns and then Lehman Brothers saw hedge funds take up short positions in the banks as the mounting evidence pointed to poor trading decisions and the ever growing bad assets on the banks books. Short investors such as Steve Eisman of Frontpoint and David Einhorn of Greenlight Capital were vocal in taking a dim view of Bear and Lehman respectively and how these banks and the banking industry as a whole was in dire straits. (Here’s Einhorn speaking for real about Lehman in June 2008on CNBC laying out the issues with Lehman, or of course more entertainingly you can watch Steve Carrell portraying Mark Baum, the Big Short’s fictional version of Eisman, in destroying the banking sector as a whole as set during the crisis while Bear Stern’s stock plummets tothe floor).

In both these cases the outspoken views proved correct as both banks ultimately collapsed to zero, but there certainly a case that the shorting of the stocks by investors such as these assisted in pushing the negative direction of the share price at a much quicker pace than it otherwise may have done. (Ironically, Steve Eisman now works for Neuberger Bermann, the Asset Manager once a part of Lehman Brothers before it was spun off in a management buyout post-bankruptcy.)

          Short sellers don’t always get it right or have it their own way. As with any speculative investment a short seller can get caught out when their negative view is found out to be false and the stock rises, or even if short term large rises in the stock mean they can’t afford to suffer the paper losses in holding out too long for their investment hypothesis to come to fruition. One case back in October 2008 actually saw Volkswagen temporarily become themost valuable company in the world. As short sellers took a negative view on Volkswagen, Porsche, who already owned 31% of the company, took out option positions which effectively gave them 75% of the company. That coupled with Lower Saxony holding a 20% stake of its own meant there was only 5% of free float shares tradeable in the market. With 12.8% of Volkswagen shares being lent out for short selling, the hedge funds and other investors who had shorted the shares were forced into a desperate scramble for the remaining shares on the market to close out their positions. This sudden demand for the VW shares pushed them sky high, rising 82% at one point, and led to the short investors being caught out and losing substantial losses on their positions.

Given the speculative nature in the ability to short shares and the potential downward pressure it can be used to put on even sound companies, why is it still allowed? There are several reasons, one of which is that the ability to short a company provides additional liquidity in a market where it may otherwise be restricted if you could only buy or sells shares that you owned. Similarly, the multi-trillion dollar equity derivatives market relies on the ability to short sell stocks, without which many derivative providers would be unwilling or legally prevented from making a market. There have been times when the ability to short sell has been restricted, such as the limited ban on short selling banking stocks immediately after the Lehman Brothers collapse in 2008, in an effort to prevent a complete run on the global baking system. But any efforts to put a permanent ban on short selling would likely be more detrimental than beneficial.

Which brings us back to Woodford, and his fight against the shorts. Investment decisions in the market has long gone past just buying companies based on the fundamentals, and plenty of investors, such as some hedge funds, will use what opportunity there is to prey on those on the way down. Some of the shorts involving Woodfords Equity Income Fund holdings were placed against his listed Fund, the Patient Capital Trust, further depressing its value. Given the Equity Income Fund’s increased holding in the Patient Capital Trust following the asset swap, it perhaps seems inevitable that in any sell down, the Trust will be forced to be sold to raise money for reallocation into more liquid holdings or further redemptions on reopening, thus attracting short investors. But the Patient Capital Trust and the Equity Income Fund also share some of the same smaller cap investments, opening them both up to investments short sellers deem most at risk from Woodford’s reallocation or redemption requirements.

Will the shorts increase as it becomes more inevitable that Woodford will have to sell certain assets, thus further reducing the proceeds he can make available for any reallocation? The fact that he is now only publishing the top 10 holdings in the portfolio where previously all holdings were available suggests that Woodford feels this also. Hedge Funds spotting an attempt to force Woodford into an embarrassing fund closure by seeking to further depress the value of the stocks he holds before he can sell them. What better scalp to have than to state a part in bringing down “Britain’s answer to Buffett”. But perhaps Woodford’s ongoing difficulties and underperformance over the last few years has instead rather increased focus and questions on some of the underlying companies. FTAlphaville is not alone in shining a light and raising questions on some of Woodfords small company investments with its takedown of BenevolentAI and its questionable current valuation. It’s probably fair to say that a fair number of the small cap companies sitting in Woodford’s Portfolios are just as much one announcement away from a valuation collapse as they are from getting to unicorn status. It’s no wonder short selling investors may have noticed the same.

Time will tell whether Woodford’s can repeat his past record, which got him his name as one of Britain’s best stock pickers, and once again come good with the majority of his picks. But time may not be on his side, as investors push for the end to suspension so they can at least reclaim some of their money and vultures sit at the gates waiting to prove him wrong.

Musings from a Lehman’s Past

It’s interesting the emotions and feelings you remember.

10 years ago tonight, as I sat watching the 10 o’clock news it became apparent that the firm I worked for, Lehman Brothers, the 4th largest US investment bank, had declared bankruptcy.

I remember the feeling, stunned at first, mouth agape watching the news looking for some sort of clue as to what it meant. Then furiously texting everyone in the team trying to figure out what next - job? No job? That feeling of utter panic with the realisation that this was really it and the unknown of what tomorrow would bring. 

Plaque on wall of 25 Bank Street during Lehman's time there

It wasn’t supposed to be that way. We all knew that things weren’t great at the firm. Bear Sterns had disappeared 6 months earlier, bought by JP Morgan backed by the US Fed. FannieMae and FreddyMac, giant US mortgage institutions, had needed to be rescued just the previous month, backstopped by massive US government intervention. We knew we were next in line, the rumours had been brewing since Bear went under - Lehman was under capitalised, over leveraged, over exposed to toxic credit products, the newspapers told us. The write downs had been severe over the previous few quarters and there was a sense of foreboding brewing internally as the share price declined rapidly with each day. 

But we were Lehman Brothers, we had the Lehman spirit and bled Lehman green. We got up every morning and gave our all for that company. No matter the hours, no matter the time, no matter the work. We came in every day and battled like our lives depended on it. That ship wasn’t going to go down on our watch. The firm had been through rough times before and survived, no one was going to drag us down this time. 

There were emails for the green spirit - Joe Gregory COO famously sent one when the rumours and the vultures first started swirling around:
“Rumour: Lehman is dangerously exposed to Icelandic Banks
FACT: Lehman has very limited exposure to Icelandic banks
Rumour: Lehman is undercapitalised and is at severe risk of not meeting its obligations
FACT: Lehman has to plenty of capital to meet its needs
Rumour: Lehman required emergency access to the Feds overnight Funding facility
FACT: Lehman required no emergency overnight funding and is perfectly able to fund its activities through normal means”
...and so it went on. 

There were statements and video messages for the green soul. The CEO and charismatic head of the company Dick Fuld sending internal video messages spreading the message that we would survive, we were better than them all and that they’ve tried to bring us down before and failed then and they’ll fail now. 

We loved it, we bought it and we took it to heart as our own rallying cry. ‘The banking world was against Lehman but we had what it takes to better them all’. 

The place was like a family. You fought for each other and you fought with each other. Working deep into the night to make sure it all ticked, whilst simultaneously screaming and swearing across the floor at each other in a rage. There was slamming of phones, screaming down phones, traders smashing screens and pens and other objects thrown in anger at people. 

We were in the trenches, it felt like a war zone, but we absolutely lived it. Grafting hard and playing even harder. Each night packing it in, sometimes 9, sometimes 10, many times later then at least a couple times a week across the river to smolenskis or the slug & lettuce - the drinks flowing and the rows forgotten, or relived in animated format. Then back in the next day to do it all again. 

I’ve not met a person I worked with at Lehman who didn’t love the place and the way it worked, it had an aura and a feeling to it not matched. Even in the anger and the monotony of some of the daily work you’d still bleed green for each other. 

The xmas party of 2006 will live long in the memory. Held in Old Billingsgate Market after the firm had just announced record profits of $4bn for the year (small for now but large back then), the troubles to come a distant dream. As you walked in the champagne was piled high to the ceiling, glass on glass. Electric violinists played a concert live to those of the 4,000 European employees present, while bumper cars and other amusements were in access in other rooms. It was a time for celebration, it was extravagant, it was boozy but the firm felt untouchable with only one direction to keep on going in. It was a party the likes of which I’d not been to before and not been to since. 

The good times were great, but it couldn’t last and it all came crashing down. There were feelings post March 2008 inside the bank that things weren’t so rosey. There were the right downs, the restructurings, the start of the first layoffs since I’d been there (I joined in 2004). But everyone took the news, from the outside and the inside, as if it was a personal affront on ourselves. As the share price went on its long decline the vultures began to circle and it got to the point as to whether we weren’t going to get through the storm without some assistance. 

Front Page of the Times on Thursday 18th September

The hedge fund shorts were circling and a siege mentality set in, but we never believed it would crash completely. There were moves to shore things up, rumours of what was required to put some stabilisation in - maybe sell the asset management arm NeubergerBermann to raise funds, sell large property holdings, there was even a large rumour that a Korean bank was about to buy a 10% stake to shore us up. 

But as it got to the afternoon of Friday 12th September 2008 it was beginning to loom that the firm may not survive, at least without some help. We were going to go the Bear Sterns route. As the head of Ops gathered us all on the 6th Floor of 25 Bank Street, a scene that was happening in the meeting rooms and trading floors across the building, the message was gloomy. We were told that we were looking for a buyer to help us out and that there were 2 firms interested - Barclays & Bank of America -, that we were negotiating with both and that by the end of the weekend our future would be sorted, but with no knowledge of what that would mean in each of our own departments. Some people would be asked to come in at the weekend to assist with providing any information that was required by the suitors. 

Those of us that went home that Friday night did so with a sense of gloom and uncertainty that the Lehman dream as it was would soon be over, but a feeling of optimism that the Fed would deliver, as it had with Bear Sterns, and assist our transition with BoA or Barclays. As the weekend rolled on and the uncertainty grew, news broke on Sunday afternoon that BoA had bought MerrillLynch, the 3rd largest Investment Bank. A sense of shock hit me but at least it was now apparent that the path was clear, Barclays would be our suitors. 

But then that 10pm news bulletin and that sense of betrayal. They had let us go. BoA had saved Merrills and Barclays and the Fed had chosen to watch us die. Everyone else had been bailed out until now (and would be after). Maybe the Gorilla (Dick Fuld’s nickname) had been right all along and they really did just want to see us fail. In the long term it was in some parts understandable the decision they took to let Lehman fail, but back then as an employee it felt like pure revenge on their part. Why save everyone else and leave us to the scrap heap?

So the text went out to a colleague
- “what does this mean? Job? No Job?”.
- “No job, I think” came the reply
- “F@&£!!!!” was my simple response

The next few hours and the night ahead were restless and sleepless. Travelling in on the tube the next day was a nervy experience. I didn’t even know if we’d be let in the building. Whereas previously there was pride in revealing that Lehman brothers pass, now only fear & shame. I arrived at the European Headquarters that morning of 15th Sept greeted by a multitude of press outside. As we went in we were all handed a sheet of paper from the administrators PWC telling us they had taken over the day to day running of the European operations and for us not to contact any clients or carry out any business. 

When we got upstairs to our desks it was chaotic. Logging into the system, seeing dozens of emails from friends & family asking me what was happening and if all was ok.....until they blocked all emails going in and out. Some people within didn’t even realise what had happened, carrying out their daily morning tasks firing off emails for action before heading to the gym! It was a couple of hours before anyone in the know spoke to us. 

Newspaper Headlines on the day after the collapse

A conference call organised by the head of Ops for all operations staff. As people started dialling in, the line got jammed as too many people, those invited and those just desperate for info, pushed the conference number over the 50 person limit. We were told to head up to Floor 11 instead, where the address would be made in person. Heading up from floor 3 suddenly became impossible as the lifts got clogged by 100s trying to get upstairs to find out what would be. The stairs was the only option and as we emerged to the packed floor, there was the global head of Ops standing atop of the desks shouting at the top of his voice so all could hear. 

There was complete uncertainty in all we were told. The firm was bankrupt, the London arm had been left to fend for itself and there was uncertainty if anyone would get paid for work done that month. Given it was the 15th and payday was the 21st there was almost a riot. “How am I supposed to pay my mortgage!” screamed one person. There were no answers just a growing uncertainty. 

Meanwhile a mob rule was breaking out across the whole building. Previously measured people were scouring the floors and the cupboards for any memorabilia they could find, or maybe sell later just to have something. People took their emergency evacuation kits stamped with the Lehman logo from under their desks to take for memories. Some people started raiding the canteen, taking whatever they could like boxes of bananas - they were owed by the firm, they felt, if they weren’t getting paid, then they’d take the payment in whatever form they could. Mayhem and chaos! 

But still the brotherhood in arms was apparent. As soon as the pubs opened at 12 people starting piling down the slug and lettuce to begin drowning their sorrows. Some drank more and quicker than others, deciding the bottom of the bottle was the only way to go. I slipped away after a couple of hours, deciding this wasn’t the way I was gonna go, but others stayed on deep into the night. Some even got free accommodation in hotels locally that night when they proclaimed their status as former Lehman employees. Volatile in its life, just as volatile in its death. 

Over the next few days and weeks we had to continue to come in to work, just so the administrators knew we hadn’t gone elsewhere and eventually they found enough money to ensure everyone got paid for the next 2 months. Those days were surreal as we turned up to do nothing productive. Spending the days sat at desks playing computer games (even the MDs!) and reliving past great moments. 3 hour liquid lunches were the norm as we fulfilled the request to turn up to ensure we got our pay check. 

Eventually about a month later in mid October the Japanese bank Nomura came forward to take on the Europe and Asian employees and infrastructure of the firm. An element of safety had been restored but it would never be the same. 

I understand the global financial crisis impacted a lot of people in a very negative way and the collapse of Lehman played a big part in that. All employees were a cog in that wheel but most of us weren’t culpable. A lot of us were lucky and got to continue in employment where others impacted didn’t. But many also lost a lot, their futures heavily invested in the firm tying their pension and current wealth in the firms shares and ultimately losing it all. (Lehman had the largest employee ownership of all large Wall Street firms at 33%!). But this isn’t about that. 

Lehman was a family, a firm that encouraged you to give everything but that you felt you wanted to give everything for. Friendships bonded there still stand strong. 

And ask most ex Lehman employees about how they feel about the firm and I’m sure they’ll tell you:

“I still bleed green”!

My Lehman Pass and some Memorabilia I picked up in the mayhem!

Could low interest rates in the long term be encouraging potential investor calamity?

"Mary Mary quite contrary,  How does your garden grow?

 With silver bells and cockle shells, And pretty maids all in a row"

          The ability for growth in the world's economy following the Great Recession can't quite be explained as easily as a classic nursery rhyme. 6 years on from the global financial collapse and we're still looking for many developed nations to prove that not only is the worst behind them, but that they're going to be on a strong forward trajectory for many years. Interest rates across the board are still at all time lows as the need for stimulus remains. Meanwhile volatility across many asset classes remain at levels below the average. With all these factors playing a part there exists a strong possibility that investors will seek to take even greater risks in the search for return.

           Whilst there is talk is of a growing confidence in the economy across the US, UK and Europe, with this being reflected in many economic indicators, from a central bank perspective this is not yet the time to hint at any imminent rise in interest rates. The Federal Reserve is reducing the amount of stimulus it is pumping in by $10bn a meeting, but the fact remains it is still pumping QE into the economy with no talk of interest rate rises until at least 2015. The Bank of England, which many are anticipating will raise rates first, is also not predicted to do so until early 2015. Meanwhile the ECB has just opted to put the rate at which it charges banks to hold deposits into negative territory. Even when rate rises do occur over the coming years, economic forecasters are not anticipating base interest rates getting beyond 2% in the US (PIMCO speaks about this level even being the new 'neutral/normal'). The UK is unlikely to reach 3% before 2018 if even much more than that further then, and the ECB looks set to stick with extremely low rates for the visible future due to its low inflation, high unemployment and still struggling economies.  All this assumes during this coming period that the economy doesn't suffer further economic turmoil forcing central banks to halt rate rises or reduce already increased rates at the time.

          With rates remaining so low, those with savings and looking to invest are seeing ever diminishing rates of return. Savings accounts, even those with boosted 1 year rates, are only getting 1.5% if you're lucky. Meanwhile the alternative for investors wishing to keep their money in a safer investment but with some security such as core government bonds are seeing continuously reducing yields with the US 10 year at 2.56%, UK Gilts at 2.66% and Germany's at 1.38%. As investors try desperately to earn the kind of returns they require in order to meet both their short and medium term goals they have turned to ever more risky investments. The peripheral European countries' bonds which just 2 years ago were reporting yields in high single or low double figures are being pushed to prices which don't adequately reflect their extra risk. Portugal's 10 year is currently yielding only 3.6%, just over 2% above Germany's, whilst Greece's yield is down to only 6.12%, a quite expensive figure considering the country is still in the depths of a continued depression and further debt restructuring is likely. Even outside the government sphere into riskier corporate and high yield bonds has seen prices pushed up (and yields fall as a result) as investors go in search of investments to give them the kind of returns they are used to, without potentially adequate assessment of the quality and risk of the paper they are buying. In the meantime, while some stock markets continue to tick up (such as the S&P 500 in the US), the rate of increase appears to be on the wane, with other equity markets, such as the FTSE 100, remaining in and around highs but not breaching those levels any further, reducing returns investors can seek on these assets. 

                       If the 'new normal' for the next 5-10 years is to see interest rates across the developed world remaining under 2.5-3% then it seems likely that more and more individual investors will seek to take more risks and effectively attempt to 'gamble' their way to retirement. The examples above show an already falling spread between more risky and safer assets but investors could be tempted to venture further into asset types which are beyond their true understanding. In the UK, especially in London, some investors who may have built up a sizeable but currently inadequate savings base, may be tempted to take advantage of the spiraling property market again. Whilst more safeguards are in place to ensure banks are only lending to those customers they deem "safer", the continuous rise in property prices, fueled in some way by the relatively affordable borrowing may convince banks and some of their customers looking for short term gains that no crash is imminent in the coming years whilst London still suffers from a housing deficit. 

             Retail investors may also seek to take advantage of leverage in other ways to multiply the small returns they can get on existing assets. There are many reports that margin loans (loans collateralised by borrowers investments) now exceed the levels pre-2008, whilst people may also seek to further benefit by releasing equity in their houses for use in investment, exposing themselves even further should house prices show a correction. There is also an ever increasing range of leveraged securities available for purchase by the retail investor. Why only get 1 times the return on the market when you can buy a leveraged ETF offering 2 or 3 times the return on an index? Whilst with the ETF purchase the investor will only lose the money they themselves invest, the ability to lose that money is enhanced because if the returns are leveraged on the way up, they're also leveraged on the way down, multiplying any negative returns. 

               The longer a period of low rates and returns exist there is also the risk that more and more less "sophisticated" investors will look to derivatives to boost their returns. This is already a factor in Japan where savers have seen the interest rates at levels close to zero for over a decade. Here it is most normal for individuals to go into their local bank and buy options on individual stocks or indices or ever more increasing complex structured retail investments. The government may seek to loosen the legislation on allowing regular retail investors (whether through pensions or individually) to purchase such products as it seeks to allow investors in such a low return environment to try better to meet their financial goals. Whilst I'm a firm believer that the use of derivatives by the individual retail investor is not specifically a bad thing in part of their portfolio, as I've mentioned previously, it's the lack of understanding that is the issue. This could cause many investors who are seeking to boost their returns to actually end up in a more perilous financial situation, negating the potential benefits and actually leaving further people dependent on the state at the time of retirement.  

              This isn't to say that any of this is inevitable. But as rates stay low and, as a result, the rate of return available to investors on regular products reduces, and remains low for a substantial amount of time, more and more investors will search for ever more risky and less understandable products to reach the financial aims they've set themselves. As a result the risk of loss and the consequences for a wider portion of the population increases. The truth is, if the existing low rate environment is likely to remain for the foreseeable future, we may also have to seek to reign in the financial goals we would normally look to achieve when the regular ability for higher returns were available to us. For those of us in the earlier years of our working lives it also emphasises the need to start saving (and investing) early enough for the future and not wait until we're in our late 30's or 40's to start a regular and sufficient pension pot. Our gardens may not grow as high Mary's, but we also need to make sure we act in the most sensible way to avoid the potential need to gamble it all away through ever increasing risk taking.

 

Getting by on being average - the benefits of following an index

                                  In most walks of life, people try very hard to make sure they're not just average. The competitive nature of sport makes even Sunday league footballers up and down the country try and be the best in their league. You certainly don't want to be the worst (and face relegation), but there's something wholly unsatisfying about finishing mid-table on a regular basis. In schools, kids want to do well in class and be above average, and in many work environments performing average could ultimately lead to you losing your job as younger employees continuously outperform you and push you down the pecking order due to the need for a normal distribution of staff performance measures.

                  That same feeling of wanting to do better than everyone else often pushes people to try and achieve the same with their investment returns as they look to outperform the market on a regular basis. We're not content with being average, we're obsessed with outperforming. At the end of the day, why would you want to just follow an index when that is just a benchmark, surely just the minimal amount, that you would want to obtain? After all, equity indices go down whereas the possibility exists of choosing a fund or individual shares which will hold their own in a downturn and excel in an upturn.

                      The reality however is that the ability to achieve "superior" returns over a period of time is remarkably difficult, especially for the individual investor, and the potential cost or loss involved in trying to do it could erode away at the necessary capital required in the long term. Many of you who read this will probably tell me that you don't invest in the market, so what difference does this make to you? But this is ignoring the fact that your pension assets will contain mainly equity funds, and it is this long term performance you should be concerned about. As I mentioned in my previous article, understanding finance and how it affects you is now increasingly important.

               When planning for the longer term, 15 and 20 years or beyond, investors are going to want to find equity assets to put in their portfolio which are going to grow at a rate which will deliver a comfortable income upon retirement (otherwise known as enabling them to live in the manner to which they've become accustomed). This will lead to the majority of people searching out the equity funds which will perform best and seeking to readjust on a regular basis.

              So how do we find these magical funds? Do we look at the funds that seemed to have performed well on a consistent basis for the last 5 years? What about finding funds that have consistently given positive returns for 10 years? Funds focusing on commodity stocks when they're in boom and looking to switch to funds in more "defensive" stocks when required? What about more dynamic funds which will reallocate between different strategies at the fund managers 'insightful' guidance? Picking a winning fund, fund manager or fund strategy in many ways is a lot harder than picking a handful of individual stocks which will grow in the long term. A quick look over many funds performance in searching for funds that will 'outperform' the market or benchmark index consistently over the longer term will turn up very few who have done this for greater than a couple of years. For every example like Neil Woodford's Income Fund at Invesco or Anthony Bolton's UK Special Situation Funds at Fidelity there are hundreds of equity funds who can't consistently beat an index benchmark.

               There are many reasons for this failure of more active funds to do their stated aim. But no matter how much information, talent or experience a fund manager may have, consistent outperformance is more difficult. The pressure for fund managers to ensure they at least don't underperform has led to many actually managing their funds as phantom index funds. The need to report constant positive performance on a monthly or quarterly basis to ensure investors don't withdraw their money (and the fund manager doesn't lose his job) lead many to be too afraid to stick with the "long term" strategies they claim to be pursuing. These phantom index funds come at the price to the investor however of paying the cost of investing in an active fund, anything from 1.5% of NAV and upwards annually, a significant cost for a fund which isn't giving you any real outperformance for the additional potential risk involved. There is a genuine lack of visibility over the real strategy followed by many fund managers. Their stated aim may be 'growth', 'value' or 'income' but which stocks or how they're achieving this you are trusting in their ability to constantly pick the right winners with not much visibility over how they are attempting this. You then need to decide, if you've made the wrong choice initially, as to when to pull out of the fund and allocate your resources elsewhere. Is it after your fund choice has "underperformed" for 1,2,3 or even 5 years? Do you chase performance by looking at the top fund performers over the previous couple years potentially engaging in the sell low, buy high strategy that you always told yourself you'd never do? By constantly trying to outperform you may actually find yourself more concerned over your investments and ultimately falling short of your intended targets by trying to reallocate constantly.

               As any good investment advisor will inform you, and research has proven, one of the most important things to do in saving or investing for the long term is to ensure you're are putting away enough of your income on a regular basis from an early enough starting point. Increasing the amount of your salary constantly saved much earlier on from a 12% rate to 20% ultimately could lead to an extra 2% a year in market returns over a 20 year period. Concentrating on putting away a sufficient amount consistently earlier on is more important than trying to find those winning funds or stocks which are going to make you rich quickly or help you retire early. Let's be honest with ourselves, getting rich quick isn't how it happens for most people, and attempting to think we're able to pick the funds continuously which will perform the best to get us there quickly is a risky strategy.

               To mitigate the added risk that we will consistently underperform the market whilst trying to outperform the market, especially once we take fees into account, it begins to make sense to aim to be the market. Instead of risking constant underperformance, investing in index tracker funds is a safer way over the longer term to attempt to get the long term returns required. Whilst this form of investing may not have the exciting aspect of constantly trying to pick potential winners, it is this precise passiveness around the strategy which should bring more comfort in your investment decision. Of course we should never make an investment decision because it is easy to follow, but if the time, knowledge and, let's be honest, lack of foresight is missing then this becomes a perfect strategy for those looking only to the long term. Others around you might be seeing higher returns in both the short and long term, but an equal number around you will also be financially worse off through constantly reshuffling. It's the advantage of getting the average return that is the market. Meanwhile the relatively smaller fees in comparison associated with these funds is also a big bonus. Rather than the 1.5% and above of active funds, these index trackers will have a fee charged of between 0.3% and 1%, depending on the fund and index. That's potentially at least 1.2% extra returns per year for you as an investor compared to active funds. To think about that in context, if the underlying level of your fund remained constant for both the active and index funds, the value of your investment would drop 11.37% more over 10 years, and 21.45% more over 20 years, by investing in an active fund. So even if you have chosen active funds who are outperforming the market, they would need to do so by over 21.45% over a 20 year period before fees to make it worth your while.

            Over the last 20 years the FTSE 100 has returned 118.96% and the S&P 500 314.38% before taking dividends into account, or 4% and 7.4% annually before dividends respectively. This would show historically you would need an annual return every year on your active UK equity fund of 5.2% and active US fund of 8.6% just to match the price return on indices. This is before taking dividends into account. The approximate average annual dividend yield on the FTSE 100 was 2.92% over this same period pushing up the required rate of return on your active UK equity fund to 8.12% (assuming the lower level 1.5% annual fee) and this is just to keep pace with the "average" market performance. Looking at these figures it does suddenly begin to raise questions as to whether the majority of active funds can justify the fees charged over the long term.

             None of these statistics are of course to say that pure equity index investing is a risk free strategy. As with all investments, there is no such thing as a free lunch (in some cases there is, but generally not for the regular retail investor and I've not got the time to go into that here). A quick look over the last 15 years will see at least 2 occasions where equity market indices have plummeted, losing over 40% of value post 1999 only to rebound back to similar levels followed by a crash of equal proportions and further recovery in more recent times. Looking at the FTSE 100 over this period specifically will show that it is still yet to reach the same high level reached in 1999, whilst the S&P 500 has shown only a price return of 51% in that time. The broader FTSE All-Share index has returned just 24%. This though fails to include dividends and the impact of reinvesting them, whilst it also looks at a simplified approach of investing an amount solely at the start of the period. It also highlights the difference to your returns depending on which index to track and poses the question about how best to allocate your investment between indices. Meanwhile by investing with someone who actively manages the fund, they in theory should be trying to insulate themselves against the large market falls which just putting your money in index funds will expose you to.

             While all of these are valid reasons as to the potential "perils" of index investing, I believe the benefits are still better than trying to use active funds for superior return. Selecting the correct active funds, for example, which might insulate you in times of a falling market, may come at the cost of substantial fees and also at failing to give you the full benefits of a rising market.  You might argue that you could only use these, or switch to cash, in a falling market, but then you are exposing yourself to trying to guess as and when to time the market peaks and troughs which research has shown investors tend to get hideously wrong. The better approach is, as mentioned earlier, making regular contributions (monthly if possible) to your investments from the start. This can make a massive difference in boosting your returns ensuring that you are still buying into the market when it is at the bottom and rising again getting more benefit immediately from a rising market.

                It is also important to remember that while the equity index number we all focus on is what's quoted on the media, both now and historically, those numbers only represent the price return and so don't account for the impact of dividends on return. Investing in index funds who reinvest the dividends received results in exposure to the total return of the index. When you take this into account, the fact that the concern that the headline index level hasn't risen much from it's peak becomes less of an issue. The FTSE 100 Total Return Index (includes dividends) has more than doubled since January 2002, versus only a 30.7% increase in the quoted FTSE 100, while the FTSE All-Share Total Return Index shows a 121% return over the period (6.8% annually) versus 44.3% for the headline rate. (Unfortunately data for Total Return Indices is a lot more scarce and only available from 2002).

             Of course, as with any investment product, the caveat emptor principle always exists. Some indices never recover, even with dividends, back to their peaks for decades, or potentially ever. The Nasdaq, from a price perspective, still sits 23.5% below it's March 2000 peak, but this is more as a result of it being a tech heavy index still shrugging off the dotcom exuberance and collapse. Meanwhile Japan's Nikkei 225 peaked at 38,957 back in December 1989. It's level at the close this morning was 14,042, down 64% nearly 25 years later. Japan too though must be taken into context, with the Nikkei 225 rising uncontrollably by 224% in just under 5 years to 1989 in response to a similar appreciation in Tokyo property prices. This unsustainable property bubble and subsequent severe collapse, following large interest rate hikes by the Bank of Japan, led to an equity market crash in 1990-91 from which Japan is yet to recover. Whilst we may be seeing a spiraling London property bubble at the moment, it is by no means comparable to that seen by Tokyo in the 1980's. In addition, the existing Bank of England governer Mark Carney seems reluctant to use interest rates as the tool to calm it down, preferring other less severe measures, seemingly learning from the BoJs mistakes. Meanwhile the effect of house price rises on UK equity markets is much less pronounced. Both the FTSE 100 and FTSE All-Share are much more affected by more global conditions given the international nature of many of the firms which make them up.

               All of this leads me to believe that, for most investors looking to grow their savings and pension pots for the longer term, index investing is the best step forward. From the substantially lower fees and growth benefits once dividend reinvestment is considered, to the reduction in the risk of constantly trying to chase the winners, the pros for me far outweigh the arguments against. There is still the difficult choice to be made of what percentage to allocate to which domestic and foreign indices, which could still impact your returns substantially, but on this the individual needs to decide. Of most importance is the need for the investor to constantly be investing, whether in a pension, ISA or both, from as early an opportunity as possible and as regularly as possible. This is what will both boost long term returns and ensure money is invested at the bottom as well as the top. It may not be as exciting as constantly seeking the best fund managers or stock market stars, but this is one of the times in life where getting by on being average will work just fine. 

         

         

       

     

The Complexities of Finance

             There's many aspects of our daily lives which rely on the help of others to ensure things go as they should. When we are ill, we seek the advice or go to a doctor to find a solution to our illness, especially when it is something of concern. When we are looking to buy a car or a new appliance the majority of people will trawl magazines or the internet seeking the best deal, reading up on the technical specifications to ensure we are getting what we need and that it works accordingly. Looking at things from that angle, it seems exceptionally strange that the vast majority of people fail to understand, or want to try to understand, one of the other fundamental aspects of their lives - finance and it's various impacts on them.

               Over the last couple of weeks I've found myself in discussions with 3 different people about different parts of the financial world. None of these people were involved in finance but I would class them all as being smart people. There was a severe lack of knowledge or in some cases a misinterpretation in their knowledge about the workings of different aspects. To me this seems to represent the population as a whole when it comes to managing their finances. Finance forms such an important part of all our daily lives that one would imagine we would all take it upon ourselves to gain an understanding, or look to someone else to give us an understanding, about either planning for the future or the impacts of financial events. As per one of the previous examples, we wouldn't look to self-diagnose ourselves as to what symptoms of all but the basic illnesses we had represented and we certainly wouldn't be able to go to the pharmacy to buy all but basic over the counter drugs to self cure. Yet often when it comes to financial matters we look to seek the solutions ourselves without first seeking the methods to fully understand both how what we are looking at works and whether it is indeed the best cure for our issues.

The situation is rather neatly summed up by Morgan Housel of The Motley Fool in his article '77 Reasons You're Awful at Managing Money':

"People usually get better at things over time. We're better farmers, faster runners, safer pilots, and more accurate weather forecasters than we were 50 years ago. But there's something about money that gets the better of us. If you look at the rate of personal bankruptcies, financial crises, bubbles, student loans, debt defaults, and savings rates, I wonder whether people are just as bad at managing money today as they were in previous generations, maybe even worse. It's one of the only areas in life we seem to get progressively dumber at."

The issue is not solely one of a lack of want for people to understand. True, there are many who consider finance, and it's relation - economics, to be tediously boring and would shirk away from reading any article, leaflet or book on the matter. But the majority of those, when the consequences involved are explained to them, find themselves thoroughly interested and wanting to learn more. But, as Housel talks about, even when we do find ourselves reading about it we still enable ourselves to make the same behavioural mistakes as others and ourselves have made in the past. To take just a few of the examples he states:

"32. You spend a month researching the best washing machine, then invest twice as much money in a penny stock based solely on a tip from a person you don't know and shouldn't trust.

55. You hate finance, think it's confusing, and don't want anything to do with it. You do, however, love money. You see no irony in this.

56. You think the stock market is too risky because it's volatile, without realizing that the biggest risk you face isn't volatility; It's not growing you assets by enough over the next several decades."

There's plenty of other snippets in there which are amusing but the core point is important.

            Forty, maybe even thirty years ago, the requirement for most people to have a broad understanding of finance was a lot lower. Investing in anything beyond savings accounts was often only the preserve of the wealthy and many pensions were still final salary based, so the need to understand much beyond the current interest rate and mortgages for the average person wasn't particularly necessary. 

            Nowadays this is no longer the case. Most people are now responsible for their own pension choices, having to decide how much and what to invest in. The creation of ISAs in the UK has encouraged more and more people to look to save their money and invest for the medium term of up to £11,500 a year (£11,880 from April). Mortgage choices are all the more complicated and even the provision of financing for cars and other personal items, which are popular to allow people to "afford" the things they don't have the up front cash for, should require better understanding. A much larger percentage of the population now has disposable income with which to use and is also more likely to be susceptible to being taken advantage of through their lack of knowledge, as the recent PPI and Interest Rate Swap scandals prove. There's only a certain amount further that proclamations of ignorance can go when trying and failing to manage our own finances.

        The obvious starting point for this education would be to include the basic concepts of finance, economics and money management as a compulsory element of the school curriculum. The complications of this are that within a society, especially in the UK, where there is already continuous debate over getting the most out of an existing curriculum, the proposal to add an additional compulsory subject on personal financial management is unlikely to get much traction for many years. This, coupled with the traditional laissez faire attitude of students to the subjects they deem as boring, would perhaps not add much more to the knowledge of the general populace. 

          Another point of education could be advice provided by employers through professional educators as part of an employees benefit package. Firms themselves are often affected by their employees inability to keep their personal finances in check and would benefit from their employees having a better grasp of their own finances and pension options. Certainly larger firms could provide ongoing advice or courses to employees helping to properly understand the various funds available under their pensions schemes and the amounts they should contribute to their pension to realistically have an opportunity of achieving their financial aims. This, as well as assisting employees in understanding other financial concepts affecting them and how to best assess the right options for them would at least give each employee equal opportunity in using their options. Everyone, of course, is different and their personal situation and risk profiles will vary wildly. But at least some level of formal education will ensure people have been given the opportunity to make better decisions.

          There is also the opportunity for the individual to seek professional advice in the form of an Independent Financial Adviser (IFA) if they feel the capacity of understanding their options to be too overwhelming. I believe there is vast scepticism amongst the majority of the population in using an IFA, which given the scandals of the past is understandable. Regulation nowadays makes it harder for an IFA to sell only specific products which they would receive a kickback on, but the fear is still there. As with any adviser though, just because they have been in the industry for 10-20 years, doesn't mean what they recommend you invest in will necessarily see you outperforming on your investments. It would still be important for the individual to understand what it is they're using their money for and a good adviser should ensure that the client is aware of this. Unless fraud is involved though, people must accept that if investments didn't perform as hoped for, they are as much to blame as their adviser because the ultimate investment decision rests with them, emphasising further the need for understanding. 

                   The reality is, unless we are truly missold by being told certain investment risks didn't exist, or that a product would definitely perform a certain way which ultimately wasn't true, we cannot blame someone else for us making the wrong financial investments. For me it seems incomprehensible that Richard Desmond, for example, can successfully sue GLG for £20m for his misinvestment into a complex product known as a CPPI (Constant Proportion Portfolio Insurance) now that it's lost him money. If he truly didn't understand it to begin with, then he should never have gone through with it. We can't blame others when we lose money on our decisions which we'd wrongly assumed we were bound to win on. It doesn't mean that fraud doesn't happen. Of course it unfortunately still does. But we do need to understand the difference of when we have been missold something and when we have purely made an underperforming investment or taken out a disadvantageous loan through our own choice. Even with medicine it is sometimes not clear what the cure is, if there even is one, but we trust that the doctor will use the best of knowledge available to him/her to improve the situation. 

           The world has become an ever more complex place and, in terms of finance, it's impact on us and our need to understand these complexities only continues to increase. Pleas of ignorance, boredom and a lack of understanding will only help us so far in failing to grasp the personal implications of the management of money. To paraphrase Morgan Hounsel, you can hate finance, think it's confusing, and not want anything to do with it, but ultimately by loving money you should feel necessitated to try to understand how to make it work. There are no definitive answers in how best to manage your money and ensure you'll have what's required at the various stages of life. The unpredictability of markets, interest rates and global economic events mean that we can only try to strive to do what's best for us in various circumstances. But we owe it to ourselves to ensure we truly understand the financial decisions we are going to make and their implications, or get the advice to understand these decisions, before it's too late.