Financial firms need 'nutrition labels'
Wouldn't it be nice to know that your money is safe?
Palm Springs, Calif.
"Is my money safe?" That's question No. 1 for many Americans today. And it goes to the moral heart of the global financial crisis: lack of trust.
But some of this trust can be restored simply and inexpensively. My idea? What the Food and Drug Administration (FDA) did for food-product labeling must be done for financial institutions. This, more than the over-reactive overregulation that's sure to come, is an important step to restoring the public's trust in financial firms once the dust settles.
Thanks to FDA guidelines, whether we're buying vanilla yogurt or meat lasagna, we can look at the label and know what we're getting. How much fat? How much sugar? How many calories?
These questions are answered before we ever buy. We may choose to ignore them for a Ben & Jerry's binge, but that's our own business. We don't need to be nutritionists to make an informed decision.
When you put your money in a bank, brokerage firm, insurance company, or other financial institution, do you know â€“ between their own internal policies and the regulatory requirements â€“ how much, for example, of your dollar the firm is holding in reserve for available cash and to cover sour debts? Is it 10 cents? 30 cents? If this information were available to you in a simple way when choosing where to put your hard-earned money, wouldn't that be appealing?
As a former senior executive at a brokerage firm with responsibility at the time for $21 billion in assets, I had to sit through frequent meetings to discuss our standing versus the regulatory capital requirements for brokerage firms, and I can tell you we boiled it down to a simple number that everyone in the room â€“ economics expert or not â€“ could understand.
All I'm asking is that something like this be made simple and accessible to potential and actual customers ... to you. I challenge all financial institutions to be the first to do this.
Of course, there's risk in transparency, as it tends to show "warts and all," and can be gamed without adequate oversight. That said, worthy financial firms might come to see it as a competitive advantage.
For example, I can set up a no-fee checking account at thousands of banks. Given the similarity of products and services among them, a good "nutrition" label that tells me the health history of the company and what will happen to my money would be a great way to stand out from the crowd of choices I face as a consumer.
Of course I could read their 10-K report, peruse their P&L or balance sheet, but who has time for that? And who has the expertise? Our current crisis has rendered such information suspect at best.
Again, I shouldn't have to be a nutritionist â€“ or a detective â€“ to figure out what I'm eating. And I shouldn't have to be a certified public accountant to understand what financial firms do with my money.
The reaction to this meltdown is most certainly going to be excessive regulation designed by congressional committees. If they're anything like current regulations, good luck trying to figure out what they will mean for you.
With mark-to-market, debt swaps, Basel II and the like, we're very likely to end up with little more than a jargon tsunami, with as much chance of achieving better outcomes as past regulations have created. Take a look at where we are today if you wonder about that.
We are starved for solutions, and here I am â€“ neither a presidential candidate nor a policy wonk â€“ suggesting something stupidly simple: Let's come up with five numbers or fewer â€“ ones that must be public and fully disclosed at all times, that tell us where we're putting our cash. Forget "buyer beware" â€“ this is informed consent.
Also, feel free to call your current bank, brokerage firm, or insurer and ask: How much of the money I put in do you hold in reserve? If you find one that answers it right off the bat and in a simple, understandable way, let me know ... I just may be their next new account, right after you.
â€¢ David Peck is president of Leadership Unleashed, a California-based executive coaching firm, author of "Beyond Effective: Practices in Self-aware Leadership," and a contributor to Business Week Online.