Thursday, June 2, 2016

Government Regulations Punish the Innocent for the Wrongdoing of the Few

The Obama Administration dumped new regulations onto the financial industry “that would require financial advisers to serve the best interests of their clients,” according to Politico. On the face of it, this makes no sense. As any merchant knows, the path to sustainable profitability is precisely to “serve the best interests of their clients.”

You don’t have to be an expert to see that this rule to override natural market incentives has nothing to do with serving consumers’ interests. In reality, it’s another government power grab intended to give government officials the power to dictate to consumers what is and is not in their best interests. How can an investor now know whether his financial adviser is acting in the investor’s best interest, or in what the adviser thinks is what some unknown government official imagines is in the investor’s best interest? Will the financial adviser now be acting to minimize the potential for a lawsuit, at the expense of potential investment gains for his client?

Judging from some of the Star-Ledger’s correspondent comments, there’s a lot of support for the new regulations. But based on what? The pro-regulation crowd is motivated by what I call the “god-state fantasy”; the image of the infallible, omniscient government official who could do not wrong.

In rebuttal to the New Jersey Star-Ledger’s predictable support of this latest Obama regulatory expansion, I left these comments below the Star-Ledger’s editorial, If it's your money, brokers should treat it as such:

The basic principle behind government regulations is: Punish the innocent many for the wrongdoing of the few. It’s no different from treating all Italians as paroled criminals because some become Mafia thugs. (Do not confuse regulations with legitimate laws against fraud, breach of contract, and the like.)

The idea that there is an inherent conflict between the self-interest of the producer and the best interests of the consumer is a fallacy peddled by the ignorant and/or people with an irrational bias against profit-seeking business. In fact, as anyone who ever engaged in work and trade—i.e., is both a producer and a consumer—knows, the interests of producers and consumers are aligned.  
A worker knows he must create value for his boss to keep his job. The businessman knows he must create value for customers to profit.

True, quick-buck artists exist in the financial industry, as they do in any line of work. But the market rewards long-term thinkers—people who know that their best interest lies in appealing to and satisfying the self-interest of those whom their work serves. I’ve been investing in securities since the late 1970s. I’ve had brokers and funds that I’ve had to drop because of inferior results. But overall I’ve been satisfied with my performance. The regulatory thugs are doing me no favors by burdening the people whom I’ve entrusted my savings to with new regulations.

The new regulations say that financial advisers have a fiduciary responsibility to put the interests of their clients ahead of their own interests. What does that even mean? Do I want a broker who has no personal stake in my investments? What kind of results does anyone expect from money managers who are legally obligated to harm themselves for my benefit? What kind of idiot would entrust his money to an “adviser” whose motto is, “I have no personal stake in how your investments perform—I’m totally disinterested.”

In the end, it is up to the consumer to take responsibility for his own investments. These new regulations won’t change that one iota. It’ll just give the lazy another excuse not to do due diligence. For those who lack the time, expertise, or inclination to check out personal financial advisers or brokers, and judge their advice, there are plenty of mutual funds and services dedicated to rating funds. But any investor who thinks this new regulation imposed on their financial adviser will guarantee better results is a complete fool.

The Star-Ledger says “Many money managers are not fiduciaries.” But what about those who are? Why should they be punished with new regulations? I guess I should expect a letter from the government ordering me to check in with a parole officer, even though I’ve never been suspected of, charged with, or convicted of Mafia-related activity. After all, if we Italians can’t reign in our Mafia activities, we deserve tougher regulations.

Related Reading:

How Government Powers of Economic Control Threatens Free Speech

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