The Problem with European Investing

May 14, 2008

The issues around investing in both Europe and the United States are daunting, but it's worse in Europe.

Matt - I want to talk some more about Europe per your request, because comparing and contrasting the issues that Europe and the U.S. face is a great way to get some perspective on the situation in different countries around the world. To my mind, the biggest issue in developed nations around the world is that not enough sensible policy-making is being put into place to help ensure the maximum economic benefit for retirees and our societies.

To answer your question specifically, the most important problem in Europe is the lack of open competition. If you think distribution channels for investment products are closed and commission-driven in the U.S., try out Europe! In a system largely driven by banks that have lived a very comfortable, padded existence, there are few in the industry who are interested in changing the status quo and going directly to investors or (what a concept) in advocating fee-based advisors who actually have the interests of their clients in mind.

As you know, I've talked about this often (thanks for your feedback on my latest 401(k) post to those who emailed me). The issues in Europe highlight the problems in the U.S. And frankly, I do see a number of paths we could go down to improve the system, but I'm very disappointed with the amount of thought and vision that has been focused on these issues by those of us in the financial services business who are in the best position to effect policy change that could bring sweeping benefits to our economies and our societies.

In fact, when I brought up the subject of the demise of defined benefit and defined contribution plans on the (very lively) panel I sat on in London, there was an almost virulent response from a couple of the panelists and some attendees. Clearly, there is some great bitterness toward the "mother state" of the U.K. in particular, which was to some degree dismantled during the Thatcher years. The reaction from a German participant on the panel, Karl Olbert, was that companies should not have risks put on them that have nothing to do with their business.

My overriding point is that I'd like to take the ideology OUT of it and look at things as pragmatically as possible. What has been the effect of us making a wholesale shift of retirement risk from companies and countries in the form of DB plans to DC plans? Despite how poor some of the pension investing has been, I've still got to believe that by and large, the answer is "worse investment decisions and lower returns."

And for the people in the bottom quarter? half? Forget it - it's sort of sink...or sink, on the ever-diminishing Social Security benefits that Matt refers to. We need to address these issues, and we need to address them now.

There is plenty of money to be made by all, but we don't need to operate on the inefficient robber-baron model that is the 401(k) - a veritable boon for the financial services industry, but of dubious relative value to investors who are pouring the bulk of their assets into some of the worst financial products available. Still, with the proposition of the 401(k) being scrapped seeming slim, at least we should mandate some decent offerings, sensible plan defaults and greater responsibility of plan sponsors to actually act in the interest of the participants (eliminating conflicts of interest that manifest themselves as company kickbacks) and greater responsibility to educate participants.

And in terms of the broader issue, shouldn't we be doing something to help optimize the returns of the large government benefit schemes to help optimize the payout that today's workers are putting into the Social Security system, whether this takes the form of sensibly defaulted private subplans or (better in my eyes) broad, diversified investments by the larger pool of assets? I recognize that there are very difficult issues here around risk and conflict, but the simple fact of the matter is that we should be more efficient as a society with how we manage the pools of assets that are increasingly necessary for longer times for more investors with fewer young workers supporting them.

The demographic trends in Europe AND the U.S. are disturbing, and indicate not only a much lower ratio of contributing workers to retirees, but also potential lower returns caused by the necessary drawdown in investments as baby boomers enter retirement.

These are serious issues. And while I'll be socking away retirement funds that will make sure I don't starve, I do feel that it's incumbent on those of us who are actually focused on the sophisticated risk-controlled investing strategy to put more effort into thinking about these big-picture issues.


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