Do you know what your investments cost? You would think that the collapse of worldwide markets would have provided a wake-up call to both governments and investors, but that’s not the case.

As a Portfolio Manager for private wealth individuals in Canada, I come across many intelligent and sophisticated individuals who have little, if any clue as to their all-in management fees with their current adviser. Truth be told, you’d probably need a forensic accountant to discover how much your investment adviser really earns from managing your money.

The problem is that all-in fee structures are just not transparent, and the Canadian government (unlike other governments in the UK, U.S, Australia) has shown little interest in forcing the industry to simplify its communication of management fees.

The reality is that very few Canadians realize just how much degradation occurs within their investment portfolios as a result of profits being siphoned out via “management”, “trading”, and “trailer” fees into the hands of financial advisers and the financial institutions that they work for.

The biggest culprit of portfolio degradation is the Canadian mutual fund industry itself. Mutual funds became popular in the 60’s and 70’s as investors realized that they could access and tap into professional portfolio managers via a pooled set of funds.

Admittedly, the concept was a good one. The problem today is that financial institutions have bastardized the concept. Thanks to the large fees attached to most mutual funds, investors are almost guaranteed to under perform the market, while bearing most of the downside risk. Meanwhile the mutual fund companies rake in their profits regardless.

Mutual funds are not the only ones offering fees that are out of proportion to the value of services received.

Many high net worth investors turn to professional investment managers for tailor made, customized investment solutions. Under this scenario, investors will often pay an investment fee to the firm. One immediate tax advantage that private wealth firms have over mutual funds is that investment management fees are tax deductible whereas mutual fund management fees are not. The “tax deductible” feature enables high net worth individuals who use portfolio managers, to presumably get better quality and service at lower costs.

These are difficult times for private wealth management firms, more so with the larger ones, as they have high operating costs and large overhead to maintain. A sharp depreciation in the value of portfolios and a migration of assets from high-margin products to the safety of deposits, money market products and government bonds, has eroded profits for many of these large firms.

Leave it to the financial services industry though to figure out innovative ways to disguise higher fee structures and market ill conceived products.

At many large firms, an incentive exists for wealth managers to churn accounts in order to generate trading fees and commissions. These commissions often serve as a drag on the portfolio and directly convert client principal into fees and commissions for the broker and firm.

Higher trading commissions are often overlooked and downplayed by private wealth firms as simply small, immaterial costs within a ‘Buy and Hold’ portfolio. Make no mistake, high trading fees eat into profits over the long run. Furthermore, it compels portfolio managers to take a “Buy and Hold” philosophy even if the situation does not call for it. It is difficult enough for a portfolio manager to slim positions when the market is in free fall, but it’s that much tougher of a decision if he knows that the account will be further eroded by trading fees. Thus, clients are often left holding the bag much longer on poor performing stocks.

“Proprietary” or “Structured” products have become the next step in the evolution of financial offerings. Most of these are marketed by large financial institutions under the veil that an investor can somehow get the best of all worlds. In truth, these products represent one more way for financial institutions to surreptitiously filter money out of the hands of investors and into their pockets.

The Globe and Mail (”Why Investors Can’t Have It Both Ways” By John Heinzl) recently exposed one such structure product marketed by the Bank Of Montreal,called the BMO Blue Chip GIC. The bank marketed the GIC as a low risk investment with the potential for large rewards — basically, a “too good to be true” offer. In fact, by the time, you go through all the fine print, an investor, in all likelihood is guaranteed to generate very low returns. The probability of there being some significant upside was highly remote yet the marketing materials clearly focused on the absolute best case scenario.

Structured products have become so bad that the Securities Exchange Committee (SEC) in the U.S. has launched an investigation into financial institutions who have over charged individual investors for structured notes while failing to disclose fees, and potential conflicts of interest.

Unfortunately, we are unlikely to see a similar investigation here in Canada. If we have yet to tackle clear abuses within the mutual fund industry, it is apparent that there is little appetite by the government to pursue further misrepresentations within the marketplace.

When I walk into a casino, I know over time I am guaranteed to lose. Most Canadians know this too. What they don’t know is that the same applies to the Canadian financial industry.

Eliot Spitzer, Slate.com Published: Thursday, April 29, 2010

In ordinary times, the SEC’s fraud case against Goldman Sachs would have been settled before it was even filed. There would have been a consent decree in which Goldman neither admitted nor denied any wrongdoing, paid a fine, and agreed to make more fulsome disclosures in the future. But these are not ordinary times, and the SEC’s very public announcement that it’s charging Goldman with misrepresentation and fraud in its marketing of a subprime debt product has become one of the biggest stories in the entire Wall Street scandal.

The filing of the Goldman case has crystallized the public support for more vigorous regulation of Wall Street. The Republican effort to oppose financial regulatory reform is now fading into an effort to forge a compromise that will give them some sort of defensible exit strategy. Under any bill that is likely to pass, derivatives trading will become reasonably transparent; a consumer protection agency will be created with a significant degree of independence; some chairs will be rearranged on the organizational deck of the regulatory ship of state; capital requirements and leverage ratios will be adjusted in ways that will be designed to reduce overall risk; and a systemic risk overseer will be created. This is all good stuff, but none of it is really adequate to address the “too big to fail” structure of the financial industry in a fundamental way. And it won’t repair the underlying asymmetry of our having “socialized risk” and “privatized gain” for those entities that have an explicit federal guarantee behind them.

The furor around the Goldman case offers an opportunity to consider Wall Street’s most profound, and entirely ignored, crisis. Now that we are seeing the inner workings of the products that Goldman is marketing, we must ask whether what Goldman and other investment banks do deserves the huge public subsidies they have received. Do they do anything that has any real social value?

In the traditional model, investment banks are thought to serve two critical functions. First, they are financial intermediaries: They are the conduits for transferring savings to those sectors of the economy that need capital. They fulfill the essential function, the economists tell us, of efficient allocation of capital. That is where their initial public offering and other capital-raising functions come into play. They enable productive companies to access the capital markets so they can grow their businesses.

Second, they are supposed to be market makers that provide liquidity and stability in the markets to permit the free flow of capital on an ongoing basis.

The question that must now be asked is: Are investment banks doing that? Are they doing the things that merit public support at all? Or are they just running a casino with products that have no great social utility? The regulators, legislators and investigators have not focused on the fact that the fundamental business of banking has changed from capital allocation to, essentially, gambling.

It’s time to start figuring out whether and how investments banks perform economically useful functions. To do that, we need to know how big banks deploy their capital and how they make their money.

So here are a few questions that I believe are structurally more important than the ones that reporters and senators have been asking about Goldman:

- What percentage of Goldman’s capital is dedicated to proprietary trading as opposed to capital formation for client companies?

- What percentage of Goldman’s profits derives from proprietary trading, asset management and prime brokerage activities; and what percentage comes from capital formation for client companies?

- What percentage of Goldman’s profits derives from marketing and trading derivatives, specifically the synthetic CDOs that are at the heart of the SEC investigation?

- What percentage of Goldman’s capital has been invested in U.S. government securities over the last year, essentially taking advantage of an interest arbitrage between Goldman’s cost of capital and the rate being paid on Treasury bills?

- How much income did Goldman derive from bets against products it marketed?

- How much capital — debt and equity — have Goldman and the other major investment houses raised for their clients over each of the past five years?

- How much capital have they invested overseas in foreign-based companies — especially through private equity funds?

This is just a starting list. The point is that we need to get a real measure of the social value of investment banking activity and to determine whether they are fulfilling the essential capital formation and liquidity needs of the markets. We taxpayers have given them billions upon billions upon billions based on the theory that they perform economically useful activities. They need to prove that they do.

The U.S. Federal Reserve must reveal documents identifying financial companies that received Fed loans to survive the financial crisis, a federal appeals court ruled Friday.

A panel of the 2nd U.S. Circuit Court of Appeals in Manhattan said in two separate opinions that such information isn’t automatically exempt from requests under the Freedom of Information Act.

Cases were brought by News Corp.’s Fox News Network LLC and Bloomberg LP. The two companies sought details about loans that commercial banks and Wall Street firms received and the collateral they put up. The appeals judges had received written arguments on behalf of other news agencies including The Associated Press.

The Fed argued that if it identified banks that drew emergency loans, it could cause a run on those institutions, undermine the loan programs and potentially hurt the economy.

Lower-court judges were split on the issue.

The Federal Reserve said it’s studying Friday’s ruling.

“We are reviewing the decision and considering our options for reconsideration or appeal,” said Fed spokeswoman Michelle Smith.

The Fed could take the panel’s ruling to the full appeals court, whose decision could then be appealed to the U.S. Supreme Court. Until a final ruling, the Fed is not compelled to turn over any documents.

In the Fox case, a three-judge panel concluded that the documents should be available to review by news organizations and the public. A federal judge had agreed with the Fed that the documents belonged to the Federal Reserve banks and were off limits to the public under the Freedom of Information Act.

But on Friday, the appeals court said the Fed must produce all relevant documents.

In the Bloomberg case, the court rejected the Fed’s argument that identifying the banks and providing other information would harm them and discourage other distressed banks from seeking the Fed’s help. The court said the disclosure requirements under FOIA are up to Congress, not the court, to change.

The Fed has been fighting the matter in court and on Capitol Hill. Lawmakers, picking up on public anger over the Fed’s role in bailing out Wall Street, have demanded the Fed be more open about its operations.

Offering an olive branch, Fed Chairman Ben Bernanke in late February said the Fed would support legislation to identify companies that used the Fed’s special lending facilities – “after an appropriate delay.” A delay in identifying the companies would help discourage investors from viewing a company as having financial troubles, he said.

But Mr. Bernanke said the confidentiality of banks drawing emergency loans from the Fed’s “discount window” must be preserved. The Fed acts as lender of last resort for banks that can’t get money from private sources.

The Fed’s discount window is a permanent fixture. That’s in contrast to a series of special lending programs set up during the financial crisis from which banks and other financial institutions could borrow. Virtually all those programs have been dismantled now that financial and economic conditions are improving.

Still, all those emergency efforts swelled the Fed’s balance sheet to $2.29-trillion (U.S.), more than double from where it stood before the crisis struck.

President Barack Obama, eager to harness and redirect voter anger over bank bailouts, is ramping up his clampdown on Wall Street. Building on his own proposals and the work of the House, the president wants new federal government powers to limit the size and complexity of large financial institutions and to limit their ability to engage in high-risk trades.

Mr. Obama’s announcement comes as the White House renewed his demand that any overhaul of banking regulations contain an independent consumer financial protection agency. The proposed agency is one of the major sticking points in the Senate and the central focus of negotiations between Democrats and Republicans on the Senate Banking Committee. The president is not going to compromise in spite of strong lobbyists fighting against a protection agency.

The tougher measures to be announced Thursday aim to limit speculation by commercial banks and to keep financial institutions from becoming so big that they pose a risk to the overall economic system. In focusing attention on Wall Street, however, the administration is also seeking to halt a wave of public anxiety that is benefiting Republicans and undermining Mr. Obama’s agenda.

Mr. Obama last year proposed a series of measures to tighten the reins on financial institutions in hopes of preventing a recurrence of the crisis that struck both Wall Street and Washington in the fall of 2008. The House passed a bill last month. But his announcement Thursday will broaden those measures, particularly by endorsing Mr. Volcker’s proposal to restrict proprietary trading by commercial banks. Such a limit would separate commercial banks from investment banks, a line that was blurred a decade ago by the repeal of the Depression-era Glass-Steagall Act. That restriction would affect some of the nation’s biggest banks, including banking giants Bank of America Corp., Goldman Sachs and Citigroup Inc.

The senior administration official, speaking on the condition of anonymity because the plan had not yet been made public, said Mr. Obama has been planning for months to toughen proposed legislation to reduce risk-taking and limit the size and scope of financial institutions. News of the announcement came shortly after Treasury Secretary Timothy Geithner had a private dinner Wednesday night with chief executives from some of the top Wall Street banks.

There was also a new urgency in the Senate to move on the legislation — an attempt to respond to voter anger at Wall Street and bank bailouts that helped propel Republican Scott Brown to victory in a contest for the seat formerly held by the late Democratic Sen. Edward Kennedy. Mr. Brown’s victory gave Republicans 41 votes in the Senate, enough to mount successful filibusters and prevent Democratic legislation on health care or climate change from getting final votes.

Have we learned anything from the financial crisis?

A year ago, investors were panicking. Now the MSCI world index of global share prices is more than 70 per cent higher than its low in March 2009. “The effect of free money is remarkable,” the Economist says. “Today, the prices of many assets are being held up by unsustainable fiscal and monetary stimulus. “Something has to give.”

John Cassidy, a New Yorker economics writer, has written dozens of articles about the crisis. Among them is a piece in the Jan. 11 issue on the rise and fall of the University of Chicago school of laissez-faire economists. Now he’s written a book, How Markets Fail: The Logic of Economic Calamities (Viking, $35), that has received excellent reviews since coming out last month.

Instead of getting into the heads of Wall Street executives, he analyzes 230 years of economic theories, from Adam Smith to Alan Greenspan. He also credits the contributions of lesser-known economists, such as Hyman Minsky, who taught at Washington University in St. Louis, Mo.

Minsky advanced the view that free market capitalism is inherently unstable because of the irresponsible actions of bankers, traders and other financial types. During times of prosperity, Cassidy explains, banks have an increased appetite for risk-taking and businesses seek more money to finance expansion. As competition between lenders increases, their sense of caution decreases. They start lending to borrowers who can pay only interest.

Eventually, they extend credit to people and firms that can’t even afford to make regular interest payments. The longer the loans last, the more borrowers end up owing because of negative amortization – or what Minsky calls “Ponzi finance.” Lenders are repaid only if the borrower somehow gets access to a new source of income.

If such a source doesn’t materialize, borrowers are forced to default and sell off whatever assets they can liquidate. This can lead to a collapse of asset values – which, in turn, can lead to a spiral of declining investment and profits and, if not checked, a depression. Minsky’s thesis that capitalist economies inevitably progress from conservative finance to reckless speculation is close to Cassidy’s heart.

He has a similar theory he calls “rational irrationality” (also the name of his blog), which means that in finance, actions can be both individually prudent and collectively disastrous. Born in England and a graduate of Oxford University, Cassidy has a master’s degree in economics from New York University and has read Adam Smith’s great opus, The Wealth of Nations, from cover to cover.

Few journalists have. “Alan Greenspan and other self-proclaimed descendants of Smith rarely mention his skeptical views on the banking system,” he says. “The notion of financial markets as rational and self-correcting is an invention of the last 40 years.

“It was based, at least partially, on a misreading of the theory of the invisible hand, which Smith had never intended to be applied to finance.” Cassidy ends with a call to arms. He wants a new system of economic regulation that recognizes the usefulness of markets, but also their tendency to break down.

Perhaps the biggest lesson learned from the crisis is one Hyman Minsky taught as far back as the 1980s, he says: “Wall Street needs taming.”

One of the most remarkable things about the financial crisis is that, despite nearly destroying the economy, it hasn’t led to any meaningful banking reforms. One might think that, after a near-death experience, fixing the system would be a top priority. But for a variety of reasons, including the market recovery, nothing has changed.

That’s outrageous, says Simon Johnson, MIT professor and former economist at the IMF. And it means that we’re just heading for a similar crisis again.

The most important and necessary reform, Professor Johnson says, is the elimination of “Too Big To Fail,” an implicit policy in which our government has agreed to bail out any financial institution viewed as large enough to bring the system down.

In Johnson’s view, the way to scrap “Too Big To Fail” is to chop the banks up and then limit their future asset size to a specified (and small) percentage of GDP. Tying bank size to GDP would allow them to grow with the economy, eliminating the need for constant updates to the size cap. It would keep them small enough that they wouldn’t threaten the system.

Goldman Sachs, for example, could be chopped up into, say, five parts. Goldman’s shareholders would still own all five parts, so they wouldn’t suffer, and the five mini-Goldmans would then be free to take as much risk as they wanted without having the taxpayer on the hook.

One of the arguments against this plan is that our banks would have trouble competing in a global market in which Asian and European banks have no such size restrictions