Good reads from around the Web.

The shares of high-flying tech firms – particularly the so-called momentum names that typically sport punchy earnings multiples – have been pummeled in 2014.

Friday alone saw shares in Amazon fall around 10%, LinkedIn and Twitter drop 8%, and the recent UK tech float AO Online languishing below its IPO price.

The latest bear to come out to call a tech bubble is famed hedge fund manager David Einhorn, who has told his investors that their fund is now shorting a basket of “cool kids” stocks.

Not everyone agrees. The following podcast (via Abnormal Returns) features a variety of veteran investors and VCs picking apart this bubble talk. While everyone on it is biased – they are all investors in high-tech companies – they are well informed, and I think it’s worth a listen if you’re an active investor.

(If you’re a passive investor in the broad indices, I don’t think you need to worry about this bubble talk. For a start, getting to ignore speculation is a big perk of passive investing. But even if there is a bubble, I agree it’s almost certainly concentrated in a handful of stocks in the tech and biotech sector).

Being the contrary sort I am, I’ve actually been having a nibble on a few of these dumped tech shares – ones that I think have a decent moat, massive market size potential, and a visible path to big profits.

Almost certainly I’m doing so too soon, and it’s only with a small amount of my funds.

The bigger story over the next few years – and the bigger profit potential – is more likely to be the outperformance of value shares versus growth shares. I mentioned this in late summer with respect to European shares, and so far it’s panning out (although Ukraine could derail things).

It seems counter-intuitive, but value shares tend to do better in growing economies than growth. The reason is that profits are easier to come by when the economy is expanding, and the debt and shonky old factories and the like that are owned by value-style companies are much less of an albatross.

As an active investor I’m finding the markets much more interesting this year – and much harder to make headway in.

Everyone is a genius in a bull market, and it was easy to feel like the Einstein of active investing in 2013.

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You’ve got to hate the terrorists. They’ve turned air travel into queuing under duress. They’ve given the military-industrial complex a shiny new casus belli in the War on Terror.

And now an attempt to curb the funding of their murderous misdeeds is making investing even more hassle.

It may seem a long way from the intifada to your ISA. But tell that to the SelfTrade customers who’ve been mailed probing interrogation forms by their broker.

What’s the connection between a covert terror cell and a questionnaire, I hear you wearily sigh?

In short, the relentless post-9/11 attempts to close loopholes, curtail the chance of skulduggery, and generally strive to Make Sure It Doesn’t Happen Again.

Monevator isn’t the place to discuss the plausibility of this mission, and whether it can – or already has – gone too far.

But it is as good a place as any to ask what information we should be required to give to a financial intermediary, and to wonder how such information is being collected and used and by whom.

Sell Lloyds, buy semtex

Let’s talk money laundering.

One consequence of the 9/11 attacks was a clampdown on dirty money using legitimate financial services companies for their own evil ends.

The justification for wanting to get in the way of this is obvious. Terrorist spectaculars are costly to fund and complicated to coordinate. Disrupt the money, and you disrupt their front line activities – perhaps sufficiently to curtail the really big and horrible stuff (dirty bombs, that sort of thing).

So far so sensible, especially when you’re a law enforcement agency fighting parallel developments in Internet banking, cheap online broking, and the myriad digital payment possibilities that today enable us to send money hither and thither across the globe in a somewhat anonymous fashion.

A consequence of this effort has been the elevation of a concept called Know Your Customer.

Know Your Customer – also Know Your Client in the US, or just “KYC” throughout the business – is a term that’s been around for at least a decade.

But a combination of the fight against dirty digital money and the fallout from the financial crisis (which revealed, let’s not forget, that many big banks didn’t even know what was on their own books, let alone their customers’) has pushed KYC up the regulatory agenda.

Another notable outcome in the UK has been the Money Laundering Regulations, which came into force in 2007.

The financial services industry is attempting to comply with these regulations via the auspices of the Joint Money Laundering Steering Group. Essentially it’s a trade body whose main function is to deliberate upon and provide guidance to do with money laundering. (The detection and prevention of it, that is, not top tips on getting it done and the addresses of bent amusement arcades that will wash your coppers for you… Just ask for ‘arry!)

You can read up on the Group’s guidance and its revisions if you’re the sort who finds sleep hard to come by.

KYC on a need-to-know basis

I am obviously not an expert on anti-money laundering legislation, the guidance notes from the steering group, nor on blowing up things for my own political ends for that matter.

My aim with this bit of background is to point out that there’s a backdrop of heightened security, and that this has probably forced SelfTrade’s hand to some extent in the issuing of these forms to its customers.

What’s interesting though – if not somewhat disturbing – about all this guidance is as best I can glean it’s up to individual companies to decide what they need to find out, in order to Know Their Customer.

The thrust is that a company needs to have some idea of the origin of funds put into its systems.

At the very least, that means an identity – a full name and address – linked to a verifiable bank account.

That’s the minimum, really, and having doubts about it is a serious business in the modern financial world – especially if you’re a money laundering reporting officer (MLRO) and you fail to alert the authorities about what you deem to be a suspicious deposit of money. MLROs can and have been sentenced to jail time for their failings.

More details on the rigours of the regime can be gleaned from this fascinating post by a professional MLRO on the Motley Fool discussion boards, who warns:

“Do not consider for one moment that this industry is not used for money laundering, market abuse or any other financial crime. Do not consider that it is only other countries that need to worry about financial crime.

The UK is one of the biggest financial markets in the world and therefore one of the biggest targets for abuse. It happens and firms need to ensure that they know who they are dealing with.

The regulations also state that this information needs to be refreshed periodically – this is typically done when client’s change details – address, back accounts, marriage, etc. This is called a trigger event and firms are obliged to obtain fresh details at this point.”

But what does finding out about your customer amount to in practice?

Nobody expects the Spanish Inquisition

I believe I’ve given a fair airing to the pressures put on firms like Selftrade to create robust systems to fight criminal activity.

However at this point I part ways, and have to side with the Selftrade customer who told the FT this week that:

“I simply don’t believe any regulation requires them to ask all these questions”.

So what’s being asked?

Three pages long (it was apparently shortened based on earlier customer feedback/fury) the questionnaire starts by asking for your name and address.

Very reasonable…

The first sign that more prying than you might expect from an execution-only broker comes with questions about your profession and your salary.

Then you turn over the sheet to find the statement that:

“Selftrade is obliged to meet regulatory requirements and satisfy itself that customer funds were generated legitimately”.

This it aims to do by asking you things like:

• What’s your total net worth?

• Has any of your total wealth been derived from employment?

• If yes, how much?

As well as this beauty:

• Provide detailed description of the source (if from previous employment, please name employer)

• Provide details of amount involved

• Provide a detailed description of the timescales involved

I’m tempted to quip that as French-owned company, perhaps Selftrade expects lots of jobs-for-life types to find this question a doddle.

But I wouldn’t have a clue how much I saved from my first of several employers – followed by long stints of freelancing, consulting, and entrepreneurship – in a working life that began some 20 years ago.

And I’m relatively young for a private investor!

There’s more. The next page asks:

• Has any of your total wealth been derived from a different source to those listed previously? (e.g. Investment/trading activity, selling assets or legal entities, inheritance etc).

And then there’s another bunch of boxes asking for the fine detail.

A reminder: This is an execution-only broker effectively asking you to rebuild your entire financial history from the moment you left school.

And it is demanding – under pain of freezing your account – an accurate description of the proportion of wealth you’ve generated via investing returns versus that which you got through just not spending money.

Clearly, pretty much nobody is going to be able to answer that question accurately. Which might not matter, except that this is purporting to be a serious question for a serious purpose.

Why ask people questions they cannot possibly answer? Franz Kafka warned us about the consequences of this sort of bureaucracy.

At the time of writing you can download scans of the form and its FAQ via these uploads here:

• The form (and an older even more complicated version)

• The FAQ

Have a look for yourself. Would you be able to answer those questions, if you were put on the spot?

Computer says “no!”

Selftrade warns in its FAQ to the form that disgruntled customers cannot simply refuse to answer its questions and instead move their money elsewhere.

You have to fill in the form or it may lock your account. Once the form is filled in, then it can release your money.

Now under the spirit of the money laundering regulations as I understand them, this makes sense. If Mr A. Unibomber is worried about being rumbled, he shouldn’t be allowed to hop from financial firm to firm whenever he’s asked something tricky.

However, at least in my experience other brokers don’t seem to be asking these sorts of very detailed, personal, and probably impossible-to-answer questions.

No wonder some who’ve received the forms have been venting their fury at the incredibly personal questions in the online forums.

To be fair, I think I can guess what the form is meant to achieve.

Presumably someone is going to input the numbers supplied by each suspect – sorry, I mean customer – into some sort of spreadsheet, and the computer is going to return Green or Red depending on whether the results seem plausible.

If you’re a 50-year old banker earning £100,000 a year with a £50,000 ISA, no worries. But if you’re a 32-year old milkman with a net worth of £1 million from brilliantly investing your odds and ends in fast-growing shares, you might have some explaining to do.

Still, I can’t help thinking the data is going to be so vague and all over the place as to make any such calculations about as meaningful as the beeps from a Geiger counter strapped to a nuclear warhead.

Moreover, a tip for MLROs everywhere – criminals lie!

Another worry is that readers of Monevator and similar websites might expect to set alarm bells ringing compared to our peers on similar salaries who spend their days reading about supercars.

We save a lot of money, and accumulate wealth early from even fairly modest salaries.

Suspicious! Does not compute!

Who watches the watchmen?

Selftrade has been voluntarily closed to new customers since early 2013, after discussions with the then-regulator, the FSA.

A spokesperson at the time cited:

“A review to enhance some of the firm’s processes”.

These new questionnaires seem to be part of the enhancement (which brings to mind the old adage about friends like these…) with a spokesperson saying:

“As an execution-only broker, Selftrade, like other financial services businesses, is required by its regulators to comply with a wide range of anti-money laundering laws, regulations, best practice guidelines and policies.  All the information and documentation collected will be used solely for the purpose of meeting those regulatory requirements and will not be used for any other purpose.”

The company reportedly has 200,000 customers and £4 billion of assets under administration, so there are a lot of people who could find themselves scratching their heads at these forms in the weeks ahead.

The bigger question is whether one firm should be able to send out a questionnaire like this – under pain of freezing a customer’s account – when another broker does not.

I don’t mean whether it legally should be able to. I’m sure Selftrade hasn’t broken any laws, or even any guidelines.

Rather, I mean whether it’s a sensible way to build a robust and acceptable industry-wide system of checks and balances that doesn’t put more people off investing in yet another new way.

It seems to me that it shouldn’t come down to a few staff in one particular firm to decide they need to know how much I – a private, law-abiding citizen – earned in 2003 and how much of that I saved, a decade or more later, when another firm seems to be satisfied with far less information.

Nor does it seem prudent for that firm to ask me to put all this incredibly personal information into an envelope and brazenly mail it, unregistered, through the post. That could turn a potential money laundering issue into an identity theft disaster.

I don’t think the law or the processes should be flexible.

The regulations should state that an execution-only broker explicitly needs to know this, that, and the other, unless they have genuine reason to be suspicious – in which case perhaps the client should be being referred to anti-money laundering specialists, anyway.

Otherwise it’s a prying bureaucrat’s charter. (Some Selftrade customers have wondered aloud if a few of the questions are simply it trying to gather data for its own commercial purposes).

Of course there would need to be a transition period while long-time customers are checked out, but I don’t see why there needs to be ambiguity under the future regime. Flexibility might seem a more softly-softly approach, but a lack of boundaries can mean a lack of restraint.

It might even be better for third-party service companies to emerge to keep this information for us, and to verify us with the different financial firms as and when required. Perhaps the credit check agencies could take on this role, or maybe some new outfits.

Another other option would be for the State to keep the data and tell companies we’re legitimate. Perhaps that’s where the mooted sharing of tax information between HMRC and private companies will ultimately take us, although at the moment only anonymous data sharing seems to be on the slate.

Obviously State-held data of that granularity comes with its own wheelbarrow load of canned worms.

Keep calm and carry on

Encouraging people to invest under their own steam – as opposed to leaving it to the hard-charging professionals, or even simply tossing their money away buying stuff they don’t need – often feels like a two steps forward, one step back sort of endeavour.

Occasionally the powers-that-be will throw us a bone to keep us keen, like the new ISA contribution limit that’s been raised to £15,000.

When that happens, it seems like they actually want people to save and invest.

But then we get a curve ball like the ridiculously obscure “reportable income” tax issues we’ve discussed previously, or this 20 questions interrogation from what you thought was just a convenient platform for owning shares.

And then you wonder if really the powers-that-be would actually rather everyone just bought investment properties in Mayfair with suitcases of cash and a barely raised eyebrow and be done with it.

Of course we should cut off funding wherever possible to cash-strapped terrorists. Yes we should stop criminals stashing their ill-gotten gains in AIM shares.

But if that entails an ever-greater requirement for the disclosure of personal information, then it should come with tighter rules about what’s being asked for and done with that data, too, and by whom.

And if people are to be encouraged to invest – which they absolutely need to be – then it’d be helpful to devise joined-up systems that reduce the burden of proving you’re not an underworld banker, when all you want to do is buy a few shares.

Good reads from around the Web.

A quick erratum: The Accumulator got an Ongoing Charge Figure (OCF) wrong in his vast roundup of cheap index trackers on Tuesday.

The correct OCF for the db X-trackers FTSE 100 ETF (Ticker: XDUK) is a mere 0.09%.

To be fair to T.A., he wasn’t out by much. Only by a factor of – oh – ten!

I’m teasing, of course. His outsized error was a misplaced decimal point, and if I was in his shoes dealing with micro-OCFs in every other post I’d be regularly missing the point.

Anyway, I mention it here because thousands of Monevator readers only consume our words through email, and seldom visit the site. They might not know about the error, because they won’t see the comments or correction.

Comments worth reading

I can see the appeal of reading via email. Who wants to get off the virtual sofa to click over to some website when you can put your feet up in your in-box?

But one reason to do so is that Monevator has a really clued-up readership nowadays, especially on the passive investing side.

A dozen readers alerted me to that OCF error, for instance, either via the comments or by email.

So far (touch wood) our commentators are mainly pleasant and informative, too. We get very few nonsensical or rude battles here, and mostly I delete dumb comments anyway.

The number of comments beneath some posts runs into the several hundreds. You may be missing out on crowd-sourced wisdom if you never read them.

Of course, the typical thread flares out after 20 to 30 comments or so. But here are a few that are still pretty active:

• Low cost index trackers to save you money

• Compare the cheapest online brokers

• University has become an unaffordable luxury

• Why I’m not paying off my mortgage

• SIPPs vs ISAs for early retirement

• Vanguard LifeStrategy turns investing catatonic

The newest comments beneath any post are always shown first. There’s a “Previous Comments” link at the top to move you back through the stack.

Have a read, and add a few words of your own if you’re so-minded.

Community centre

A few years ago Monevator used a special plug-in, which enabled me to list all the new comments on the site in a table, like you see with a discussion forum.

Unfortunately it was discontinued and I haven’t found a replacement. If anyone has any pointers, please do let me know. (I’m not interested in a simple “Latest comments” sidebar widget. It’s a page collating comments that I would like.)

I also want to upgrade the comment system to enable you to post under your Facebook or Twitter identity, should you want to. This is easily done, but it has knock-on consequences so I go around in circles and procrastinate.

Finally I have a full-blown discussion forum waiting in the wings!

Techie types may be excited to know I am going with the sexy and modern Discourse system for this.

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