Tom Sedoric

Financial transparency is more than simply disclosing required information. As financial advisors, it impacts nearly every aspect of the role we play. It means being honest about performance and holding to proven financial principals, even when so many others are abandoning them for short-term profit. It is such a large part of who we are, that we wanted to share our thoughts on transparency and answer some common questions about what the concept means to us.

What exactly is transparency in the context of financial advising?

Financial transparency in the context of investing, according to the SEC, is “timely, meaningful, and reliable disclosures about a company’s performance.” But what does that mean for the financial advisor who wants to provide the full picture of a client’s investments and savings? In the years since the 2008 financial crisis, we’ve all done exhaustive due diligence to ensure we’re providing the transparency our clients need. I’ve crafted a great mantra that I can live with—we need to know what we own and why we own it. This goes for stocks, bonds, alternatives or any kind of investment in which we entrust our money. “Just the facts, ma’am” is an appropriate saying for the “post-crisis investor.”

Why has transparency become a top priority?

Since the market collapse and subprime bubble in 2008-09 it has become clear that financial innovation was considerably ahead of regulation. The CDO (collateral debt obligations) and CDS (collateral debt swaps) phenomenon represented the gulf between a fad that everybody wanted (precisely because everyone was doing it) and an understanding what these innovations actually were. Not unlike the prior dot com bubble, everyone “wanted in” without fully understanding the inherent risk in their investment.

Why did transparency become a secondary concern?

In 2020, we saw what is likely the end of one of the longest economic recoveries in US history. While no one could foresee a global pandemic and the economic impact it would bring, there were ample naysayers in 2019 predicting the end of the “bubble.” Whether it’s a bubble or simply a long period of sustained growth, investor psychology shifts. No one wants to be left standing on the platform when a seemingly profitable train leaves the station. The need for transparency was usurped by, for lack of a better term, greed. From the 17th century tulip mania in Holland to the tech bubble in the late 20th century, economic bubbles grow rapidly and large when transparency wanes. Too many investors forgo long-term fundamentals and shoot for a seemingly potential painless and risk-free gain. It’s true that some do profit but they are a well-placed minority who understand the rules of the casino—especially the caveat that those controlling the house know that it takes a sizable majority of losers to finance the healthy gains of a small minority of winners.

Why does transparency matter for long-term investors?

Simply, transparency is a critical and necessary component to ensure that investments are aligned with objectives. Whether one’s focus is on income, appreciation, or to hedge risk, transparency is one of the best navigational tools available.

Is transparency making a comeback?

Traditionally, transparency returns after an economic bubble bursts. It is clear in my experience that the more transparency is ingrained in the system, the less severe and catastrophic the next bubble will be. The key is this—transparency becomes the rule and not the exception when we demand it.

It appears that the lessons of the last decade have helped protect consumers for this current period of economic uncertainty. For example, household debt is at a historical low of 96% of GDP. People are saving more as well, with households now putting aside 8% of their income. This is great news for financial advisor and transparency. As Sy Syms, the late retail visionary, said “an educated consumer is our best customer.”

How does transparency fit into the bigger social picture?

Transparency matters not just in the financial realm but in other elements of our society. It is required for a healthy economy and democracy. The economic crisis of 2008 had a lasting impact that is still being felt today. Not only did it make consumers more cautious in terms of investing and overextending financially, we can see the collective need and drive for more transparency and accountability in the social movements of the past decade to today.

Like any lofty ideal, the pursuit of transparency is never ending but it is a necessity. The alternatives are more chaos, more destructive economic bubbles, and more shortcuts to greater corruption and financial manipulation. Ask for transparency.

 

Statistical information has been obtained from sources believed to be reliable but its accuracy and completeness are not guaranteed. The views expressed by Tom Sedoric – Partner, Executive Managing Director and Wealth Manager are his own and do not necessarily reflect the opinion of Raymond James or its affiliates.