Wealth Management

Voted #6 on Top 100 Family Business influencer on Wealth, Legacy, Finance and Investments: Jacoline Loewen My Amazon Authors' page Twitter:@ jacolineloewen Linkedin: Jacoline Loewen Profile

July 27, 2012

Should Banks Take Their Losses Through Free Market Mechanisms.


Some business owners tell me that they believe the mainstream financial sector has convinced an entire generation to buy and hold because it suits their business model that is asset-driven rather than performance-driven. 
Are the bulk of financial institutions simply regulatory oligopolies with asset-harvesting business models more concerned with fees and proprietary speculative activities than with providing any useful services to savers and retail investors? Is this a true reading of the finance industry?
My husband was a financial analyst for a broker dealer and they would only issue reports on buy or hold or sell because their brokerage would process the changes and charge a fee. That model has changed. Large financial firms in the USA appear to have an intrinsic institutional bias to be bullish. Where is their incentive to tell you not to invest in something, as they will usually be operating a fund in that area. This need to keep the investor invested is causing sophistry as being "underweight" unattractive asset classes rather than encouraging selling.  The investment insight is too often: sit tight, everything will go up in the long-run. These conversations about concern over stock performances are becoming common and there is an increasing noise. Most of these entrepreneurs are not critics of the financial sector, and neither am I. They appreciate their role. So what is the problem? Has the sector become too large? Did the corporate finance whiz kids take the reins from the bankers and change the race too much?
Here are the questions I have heard from business owners over the past few years:

Question 1: What is the Profitability of Banks?

Corporate profits attributable to the US finance sector were effectively stable from the 1950s to the early 1980s from 5% to 15%, then as the growth in the money supply turned sharply higher on a sustained basis in the 1980s they peaked at 40% in the early 2000s and still remain around 30% - substantially higher than long term averages. 
On an asset basis the numbers tell a similar story. The 20 largest banks in the US have combined assets of approximately 90% of GDP. The five largest banks - JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, and Goldman Sachs - have combined assets of approximately 60% of GDP. These numbers are roughly 3 times what they were in the 1990s.
Canada's leading bank, TD which is now in the USA, had a thoughtful look at this very issue. The CEO asks why the bank executives should make more than the business owners. He said that if the bank is making more than those who create the wealth, that will have a long term impact on the Canadian economy. That is fantastic leadership and probably why TD is the still the leading bank in Canada and on the list of top 20 banks in the world.
The concern is the appearance of the American finance sector's intimate relationship with government and central banks. It is not surprising that it grows faster than the underlying economy. Newly printed money flows into and through the finance sector acting as a wholesale subsidy that drives corporate profits, compensation and speculation. Despite widespread belief to the contrary, government intervention into broad swathes of the financial sector to support "too big to fail" banks or, more accurately, to prevent capital destroying business activity from being eliminated to the benefit of the entire economy is not a positive for future growth.  When it is funded via expansionary monetary policy, business owners know this and see it is laying the groundwork for stagflation.

Question 2: What is the Long Term Impact of Government Bailouts?

I was fortunate to be at a speech by Stephen Roach, Economist for Goldman Sachs, who once suggested taking a bat to Paul Krugman, and I am paraphrasing:
Whatever you subsidize you actually encourage. By subsidizing failure we are ensuring bigger failures in the future and worst of all penalizing well-run businesses. He said that the firms that were prudently managed leading up to the crisis should have benefited from the demise of their poorly-run, profit over customer service, riskier competitors.  In a free economy, capital would have flowed to the profitable businesses rather than the loss making ones. The fact that this didn't happen creates a perverse "if you can't beat'em, join'em" mentality with respect to risky and imprudent business practices.  
 I worked for a bank as the corporate strategist, and it was owned by the founders and a wide pool of banks executives, then it went on the stock market. They kept their good banking practices at a cost to their bottom line growth. During the 2000s, they did not want to do high risk swaps and derivatives or risky deals and they were asked, "Are you in business or not?" Why should they now get penalized again? They lost out money on the upside and they lost out money on the downside. 
Did you see the documentary on the bail outs with the few bank heads seated around a table with George Bush and the candidate Obama and McCain? It seemed so cozy. I know it was a terrible time with the whole US economy ready to go down the chute and no one really knew what to do. Yet, the business owner I worked with at the same time period, did not have cozy talks with government leaders. Is that too much power in a few hands or is that good management? We learned later that bankers picked Obama as the Presidential candidate of choice, and fed him information (and money) not given to McCain. Is that crony capitalism? 

Question 3: Who Really Gets Helped By Low Interest Rates?

Another question asked by entrepreneurs and owner-operators dealing with banks is, What exactly is the primary purpose of low interest rate?"
We are told it is to save the economy, but is it really it is to save the American banks? It gives them time to get their house in order.
Owner-operators are getting denied loans. The CFOs understand why. After all, would you loan $10M to a business during this economic climate at a low interest rate? No. You would put it into commodity stocks or gold because for a way lower risk, you are getting a similar return. 

 Question 4: What are the Bank’s Housing Losses Doing to the Economy?

Stephen Roach actually gave me the answer. He thought the banks would be asked to eat their loans and take the hit via the free market. So far, that does not seem to have happened. 
Low interest rates are simply a case of robbing Peter to pay Paul as capital is being "strip-mined" from savers via low interest rates and in effect "donated" to the financial sector. Roach argued that the enormous size of the American and financial sector coupled with the American Bank's current insolvency, which the constant bail-outs are attempting to disguise, will be a drag on growth for years unless losses are allowed to take place via free market mechanisms. 

July 26, 2012

Bringing professional management into a family business


Every family business has its battles over growth. Advisers can wax poetic about how to increase wealth, but owners inevitably think they know best and often trust only their children to take charge.
Nowhere are these differences as stark as they are on the subject of embracing professional help to build the business.The subject remains an awkward stumbling block for too many family firms, which control up to 40 per cent of GDP and 43 per cent of the jobs in Canada. The federal government is keen to see growth and it wrings its hands over the dearth of big Canadian family businesses such as worldwide titans Wal-Mart, Smucker Foods, Samsung or BMW.
A study by McKinsey found that a key reason family businesses survive beyond the second generation is through the appointment of professional management. With an outsider as CEO, a family business tends to live past the third generation. It's particularly interesting to note that these legacy businesses tend to outperform corporations, both public and private. But that sizzle does not sell the steak.
When you ask in-laws or second generation sons and daughters in family businesses to explain the allergic reaction to professional management, they frequently sigh and tell you founders tend not to listen to advisers. To understand the reluctance of owners is to work in their shoes, which typically means 15-hour days. They achieved success by doing it all themselves. It is counterintuitive to seek help, especially when the expertise costs money.
The next generation, in general, is under paid but it is the first line of resource for employment and trust. Families in the jewellery business, for example, have the pressure of working with high-value products that can be easily stolen. Family members may not be the sharpest knives in the drawer, but they fulfill the trust requirement of the job description.
In private, family business owners will explain that any amount of time spent on succession planning, exit strategies or learning about private equity is time spent not earning money. They rarely even approach the discussion of bringing in professional CEOs. There is a higher sense of achievement from the daily work than there is from getting out the red pen and planning. "It is faulty logic," says Tom Deans, who worked in a family business and wrote a treatise on his experience in Every Family's Business.
"That is the common reaction, but as soon as family businesses do put in the tools, they start to run better. Few family businesses have a planning culture. The entrepreneur is a problem solver who is great at putting out fires. This is very different from the problem of how to protect the equity in the business and the retained earnings. The biggest problem, in fact, is the long-term plan for the business."
Family firms turn to their accountants first, and then their lawyers, who are smart but, in fairness, are not business experts. Owners are basically relying on professional technicians who are trained to take instruction, not to take the often- frightening risks necessary to grow a business. Lawyers may not want to forge relationships with professional CEOs, and they may have a light sprinkling of knowledge about private equity partners who, they assume, will ruthlessly bring in their own lawyers and accountants.
Why would these professionals press owners to bring in outside management and risk their relationship? Laissez-faire, mon ami.
Family business should be turning to wealth managers who know how to diversify money and minimize risk. "They must evaluate and anticipate the need to re-invest, divest, partner or exit," says Guillaume Lagourgue of UBS Wealth Management.
Taking on private equity partners for a five-year period reduces risk with fresh capital, but it also forces the awkward truth - maybe it is time for family members to step aside and make room for a professional CEO. With these changes, a family business is far more likely to become a legacy beyond the founder's lifetime. Once an owner experiences the new wealth, in hindsight sharing control seems like a no-brainer.
Bringing professional management into a family business also challenges the family lifestyle, the comfortable power, the good-enough revenues that pay mortgages. The cost of letting go of some of that control will boost a family's wealth for retirement. It could also produce a legacy Canadian family business that does not end up sold as a branch office.
Special to The Globe and Mail
Jacoline Loewen is a private-equity expert for business owners and the author of Money Magnet: Attract Investors to Your BusinessShe is the director of Loewen & Partners and the Exempt Market Dealers Association.
Join The Globe's Small Business LinkedIn group to network with other entrepreneurs and to discuss topical issues: http://linkd.in/jWWdzT

July 25, 2012

Other Financing Options for Financial Technology

For early stage tech firms focused on the finance industry, they can get picked to be part of a group of six that get client and financing help. Instead of waiting for tech entrepreneurs to bootstrap themselves into relevancy, the banks are using FinTech Lab to cherry pick the most promising ideas and turn them into functioning companies, faster.
 FinTech Innovation Lab gets financial technology start ups showcased, and this year's crop of six winners are promising a gamut that runs from CIA-inspired security and role-playing-game-like training programs.
The lab was started last year as a way to compete with financial technology growth happening in Silicon Valley and bring a new breed of innovation to the nation's financial nexis. The new class of six companies  are aiming to create a future that's all about gamifying typically dry financial data and making big data programs have Sherlock-like deduction powers. Big New York banks and venture firms are mentoring them.
"You have obviously tremendous domain expertise in financial services," said Maria Gotsch, president and CEO of the New York City Investment Fund, which, along with Accenture, co-organizes the program and its demo day event that occurred Wednesday. "The sector that is going through some restructuring right now. Any time there is restructuring there is time for new ideas."
The program aims not only create jobs, but also ushers in a new era of security and technology in the nation's financial hub.
Jacoline Loewen
Business Development
Loewen and Partners
Author of Money Magnet, Attract Investors to Your Business

July 24, 2012

Are Entrepreneurs Creating Jobs?


Something may be puzzling to some. Why do people regard entrepreneurs the same way vampires regard garlic, otherwise known as the stinking rose? Is there something stinky about building a business around what began as an innovation like the plane, the car, the light bulb, the Macintosh, Levi Jeans, Coke, or the more recent DeVinci mentioned by George Savage on the Main feed?
America still has the longest list of billionaires by far, most are self made, their businesses grown by customers with the free will to buy their goods and services. In comparison, the list of the billionaire rich people in other countries is very short, perhaps because too often the political class are the wealthy, enabled by their public sector (insert country name here, e.g. Russia, China, Zimbabwe).
In corporations, key executives will hold on to a role and organizational structure long after it has served its purpose because the structure is a source of their power.
These companies eventually go bankrupt.
We have certainly seen far too many of the political elite in many countries hold on to their power and seek to get more power, no matter the life and death consequences for their citizens and their country's economic health. In history, the battle for centralized power by political elites against the decentralized power of entrepreneurs has been the battle of the last century. Yet here it is again but now in America. Some of my professors at McGill University taught me that capitalism was not a good system and would implode by 1985. What actually happened, the Berlin Wall imploded instead. 
Communists believe that the place for entrepreneurs is in front of the firing squad. Marxists see the use of keeping business owners alive, but to put the stinking, greedy entrepreneurs in their yoke, pulling the plough to give off jobs and a larger share of salaries for workers. The business owners duty, above all,s is to pay larger tax returns because the entrepreneur did not plough that field by themselves.  Somebody helped them and they owe those somebodies more, more, more.
The unions are about gaining power over the dynamics of entrepreneurship and the free market. If unions were about the health of the company, they would know the customers pay their salaries. And by customer, that does not include the government using tax payer money to create artificial demand.
Marx created the word capital - Das Capital. They are also trying to make all business owners be known as vampire squid face suckers or whatever they were calling Goldman Sachs. This view of business owners is gaining rapid traction. When Ms. Warren, a Harvard professor can recite the Das Capital playbook,  and then the President repeats this ideology, this is a rallying call for revolution. It is a call to shift power, in my humble opinion, to unions and centralized control by government. 
What do you think? There are some business owners who deserve to be called vampires (cough...Goldman Sachs). Do people put all business owners in the same category as large, public corporations? Does the distinction matter? Do people see companies with a paid CEO or a family business owner differently? What can businesses do about this image of "you did not build that by yourself."

July 19, 2012

The Bachelor Ben Flajnik Shares His Delicious Epilogue Wine

  As a fan of The Bachelor reality TV show, I recognized Ben Flajnik in Toronto. At first I hesitated to bother him because he would prefer some privacy, but then I realized that I had been wondering if his wine was in the local LCBO, like Firestone wine. I did not even know the brand name - he might try Ben Flajnik for a new blend.
Anyway, what a delightful man who must be very tired of people interupting his day but who did not give me a hint of irritation. When I asked him about his wine - Epilogue, by the way - he glowed that entreprneural glow so familiar to those of us in the business of Private Equity and Venture Capital. When deciding on financing business owners, the character of the person is the most critical element in making a positive decision and Ben has wine in his DNA. He is also surprisingly humble. He spoke about how he and his partner ,who is in the photos on the website, were in Toronto promoting their listing. They were all over the news, but I had missed this important fact.
I predict success for Ben as he obviously enjoys his business and since my husband picks up a bottle of Firestone wine for me regularly, now he will have another "The Bachelor" wine to add to the list.
Congratulations to entrepreneur, Ben, and my husband tells me he will be picking up several bottles in the Epilogue label to take to friends up in cottage country this weekend. What will you be drinking?

The Bachelor's wines:
Visit: info@involvewines.com
http://www.evolvewinery.com/http://www.involvewinery.com/
The Bachelor Ben Flajnik
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