This was in the news last week.

A large number of Financial Advisers are leaving the job because they must pass an exam testing their knowledge of financial regulations by the end of this year. The exam is not hugely difficult but there are a significant number of advisers who are unwilling or unable to get it done. Anyone who has not passed will be removed from the register of Financial Advisers.

Changes to fee regulations are making it harder for financial advisers to generate income. The old ways of doing business no longer work and some are unable to adapt. It is a relatively old workforce and some have decided that it’s a good reason to retire.

We also have a higher educational standard for new entrants who must have an approved university degree.  This means that the number of new advisers is much lower than what it was previously.

There are less advisers but they are also better educated and more likely to provide high quality advice.

The problem for clients is the difficulty in finding an adviser who is available to help them.  This is not just in Australia but is a global problem. An unwillingness to access professional advice is a factor.

There is also a tendency to believe that it is possible to access useful information merely by googling it.  Many people who feel that professional financial advice is not relevant or obtainable for them turn to non-regulated investment opportunities.  The downside is a proliferation of asset bubbles and scam investments


Trading in Bitcoin and other Cryptocurrencies (digital coins) has exploded recently.  This has attracted mainstream press coverage and institutional interest.

Bitcoin is a perfect tool for gambling on financial markets.  It is no more useful than a tulip bulb but has been wildly profitable up until now.  When enough people lose confidence in it the price will collapse because there is nothing else maintaining it.

A Cryptocurrency is a digital asset based on a decentralised computer network and secured using cryptography to protect against counterfeiting.  They are maintained using Blockchain databases.  They exist seemingly outside the control of governments, central banks and wall street financial institutions.

The supply of coins is tightly controlled as it can only increase through processing of data (Bitcoin mining).  The total value of the supply of all cryptocurrencies is approximately US$1.5 trillion.

The stated advantages of cryptocurrencies are the ability to transact across borders with minimal cost and to do so relatively anonymously.

The disadvantages are that unlike a regular bank account losing your private key can result in the complete loss of your coins.  They are also more susceptible to loss through fraud than regular bank accounts.  Bitcoin scam emails now far outweigh Nigerian scam emails.  Updating blockchains through coin mining is also highly resource intensive.

The price of bitcoin is also extremely volatile as it has become a vehicle for speculation.  Some consider it an alternative investment to cash deposits given the low interests currently on offer.

Some of the support for cryptocurrency is based on far right, anti-government ideology.  Supporters cite it as being insurance against “unhinged monetary policy” and a general distrust of the government/central banks etc.  The theory is that quantitative easing (money printing) and low interest rates will inevitably lead to uncontrolled inflation.  Some consider this to be a conspiracy theory.

The main reasons why interest rates are low are that more money is being deposited into savings than is being borrowed and central banks are keeping them low to manipulate exchange rates.  There is a limit to how much control the central bank has over interest rates in the bond market though.

There are suggestions that bitcoin could become a global single currency to enable easier transacting across nations.  The Euro was intended to do this in Europe but many people rejected this concept too.

So, is it a better investment than real estate or shares?

Right now, crypto-currencies are a small niche asset with a total value less than 2% of global share markets and less than 0.5% of global real estate.

The sharemarket has delivered a net return of 7% a year for the last 10 years.  That is enough to double your money.  Some feel that they need to earn a much higher return than that so there is a blurring of the lines between investment and gambling.

Real estate has delivered a similar return and is likely to be a more reliable hedge against inflation but property transactions are difficult, expensive and take a long time to complete.

It is feasible to calculate an expected return on shares and real estate based on financial performance (rent, dividends/profits etc).  It is not possible to calculate an expected return for bitcoin because the price is purely driven by supply & demand.  This makes it more like gold and other commodities.

There is a strong link between support for cryptocurrencies and support for the gold standard for currency versus central bank issued “fiat” currency.  The practice of linking currency to gold was discredited because it did not enable financial or economic stability.

Ponzi Schemes

It’s the end of one Ponzi schemer, Bernie Madoff dies in prison at 82.

Charles Ponzi started his eponymous scheme in January 1920 and by the end of the year he was in jail.  He learned the scheme from his employer Luigi Zarossi and the earliest known examples were described by Charles Dickens in 1844.  Ponzi became famous due to the scale of the scheme and his brazen behaviour.

It’s a simple scheme where money is pooled from investors who are paid above normal returns out of capital.  The scheme will continue for so long as the amount of new investment exceeds the amount of payments.  Given that there is no legitimate investment or business activity creating profits the scheme will inevitably collapse at some point.

One hundred years later new Ponzi schemes are being uncovered on a weekly basis: Wunderkind’s alleged $970 million fraud jolts Singapore. Bernie Madoff is the largest so far but by no means the last.

Many of Ponzi’s victims were unsophisticated migrants but large, well-resourced corporate entities are also falling victim.  There are likely many hundreds of these schemes that do not make it in to the news either due to the small size or unwillingness of the victims to report them.

If an investment opportunity seems too good to be true then it must be a scam.


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