Innocent investors abroad
Global investments require a long look – and longer due diligence
And just as individual investors’ long-term
record of performance is nowhere near the
index averages, investing globally can easily
become a buy-high-and-sell-low debacle in
your clients’ portfolios if not done well.
Let’s go over a few basics. When you hear
the term international investing being used,
that refers to investments that are devoid
of any U.S. holdings. When the term global
investing is used, that may include foreign
holdings or holdings based in the U.S.
The next question is that of sizing the op-
portunity. From all of the reports that I’ve
seen in the last few years, it appears that cer-
tain foreign markets, specifically the emerg-
ing markets, have larger growth prospects
than the U.S. over the next few decades. That
makes a lot of sense to me. Add the attrac-
tion of modern-day comforts to economies
that have a higher savings rate than the U.S.
and you can almost see the buying frenzy that
may erupt as these comforts become ubiq-
uitous. This alone, however, does not make a
terrific profit opportunity for investors.
Investing globally has garnered a great deal of attention recent-
ly. It’s on the minds of clients, advisors and the manufacturers
of everything from exchange-traded funds to separate accounts.
vestment advisors, and only well understood
by financial analysts with significant experience in foreign investing. Perhaps this is only
the first of many reasons why CPA advisors
are well advised not to rely on the popular
press and fake it as a portfolio manager. The
wise advisor will seek specialized help.
Political instability seems to be the way of
many foreign nations — especially when you
get into the less-developed nations around
the world. Head east to Africa, the Middle
East or parts of the Far East, and it seems like
the norm. Can you even remember a week
in which there wasn’t news about rigged
elections, dictators and assassination plots
in some remote spot on the globe? It seems
rather obvious, but it may not be good for
your portfolio to be invested in countries
where people are killing each other over a
bottle of water.
REMAINING LIQUID OVERSEAS
Liquidity is also an issue, and from several
perspectives. First, world stock markets are
not always open for what we may consider
normal trading hours. In the U.S., markets are
traded five days a week for 6. 5 hours per day.
But the Karachi Stock Exchange is only open
for 4. 5 hours per day. The Egyptian Stock Exchange is only open for four hours per day.
(Egypt is a great example, as we have seen
nearly every risk known to foreign investors
in the month of February alone.) Most foreign
country stocks can be purchased through U.S.
firms that have relationships with traders on
the floor of these foreign exchanges, but that
puts yet another middleman in the way of
your assets going to work for you, and yet
another layer of fees.
Liquidity again comes into play when you
want to trade in something that is thinly traded. Without adequate trading volume, pricing
— and therefore the value of your holding
— is suspect. Exactly what is your investment
worth if there have only been a few trades
over the past month in that position? You may
not really know until you try to sell.
John P. Napolitano, CFP, CPA, PFS, is chairman and CEO of U.S. Wealth Management
in Braintree, Mass.
There are risks that come with investing
globally that are very unlike those we deal
with here in the U.S. The risks are currency,
political instability, liquidity, transparency
and inflation. Each one of these risks is fairly
material in its own right, but if you get a few of
them working in harmony against you, your
investment can get crushed.
Currency risk is a lot deeper than most
investors understand. Naturally, it’s a concern if the value of any currency fluctuates
wildly when you are invested in assets of that
nation. But when invested in foreign assets
whose local currency takes a nosedive, it’s not
necessarily bad for you because it is possible
that the U.S. currency takes an even bigger
nosedive. It is also possible to own foreign investments that are denominated in the local
currency or U.S. currency. That is a decision
that is frequently over the head of most in-
TRANSPARENCY AND INFLATION
Transparency in the U.S. has gone from a
buzzword a few years ago to the way we do
GAO: FINANCIAL PLANNERS
ARE REGULATED ENOUGH
WASHINGTON, D.C. — The regulatory
structure applicable to financial planners
covers the great majority of their services,
but the attention paid to enforcing existing regulation can vary, and certain consumer protection issues remain, according to a new report from the Government
The Dodd-Frank Wall Street Reform
and Consumer Protection Act mandated
the GAO study. The agency reviewed
federal and state statutes and regulations, analyzed complaint and enforcement activity, and interviewed federal
and state government entities and organizations representing financial planners, various other arms of the financial
services industry, and consumers.
The GAO noted that while the regulatory structure for planners covers most of
their services, there are still some issues.
First, consumers may be unclear about
when a financial planner is required to
serve the client’s best interest, particularly
when the same financial planner provides
multiple services associated with different
standards of care.
Second, financial planners can adopt
numerous titles and designations, and
consumers may not understand or be
able to distinguish among them. The SEC
has a review under way on financial literacy among investors and incorporating
this issue into that could assist in assessing further needed changes. Finally, the
extent of problems related to financial
planners is not fully known because the
SEC generally does not track data on
complaints, examination results and
enforcement activities associated with
financial planners specifically, as distinct
from investment advisors as a whole.
An additional layer of regulation
specific to financial planners does not
appear to be warranted at this time, the
GAO noted. The report did suggest that
the SEC assess investors’ understanding
of financial planners’ titles and designations, and that the SEC collaborate with
the states to identify methods to better
understand problems associated specifically with the financial planning activities
of investment advisors.