Ihate our regulators. Of course, when I say "our," I really mean "your" - because as nearly as I can tell, writers and journalists are as unregulated as the birds that fly through the air and the fish that swim in the sea. Nobody certifies us. We carry no educational credentials on our business cards. We aren't even asked to pick up CE credits.
And if anybody from Washington ever visited my office to check my "books and records," she'd fall into a deep black hole and the world would have to manage with one less regulator.
Many financial services professionals, on the other hand, live under the inconstant but annoying supervision of the SEC. The agency's underpaid bureaucrats seem to live in the not-unreasonable hope that if they play their cards right and don't upset any powerful Wall Street executives or get too zealous about protecting the public, they'll eventually be paid an enormous salary by a regulatory fixer organization like the one that now employs former SEC boss Mary Schapiro, or a lobbying/law firm like the one that hired another ex-SEC chair, Christopher Cox. Or they could land a cushy "compliance administrator" job at a Wall Street firm, making sure former colleagues don't interfere with the latest creative investment opportunities that may or may not bring down our financial system.
And don't get me started on FINRA, whose directors are executives at firms the authority supposedly regulates, or "public" board members who are actually former executives of large financial services companies. FINRA seems to be unrelentingly zealous about protecting the public from doing business with Wall Street's fiduciary competitors.
I should also include on my list our esteemed members of Congress, who set the rules, and who seem to listen more carefully to organizations whose representatives arrive holding bags of money.
REGULATORY CAPTURE
There's actually a term for this takeover of regulatory bodies by the groups they are supposed to oversee. It's called "regulatory capture." I think that after 73 years, the securities industry has captured the SEC and FINRA about as openly and thoroughly as possible. The phrase already appears in Wikipedia; I'm only mildly surprised there aren't helpful illustrations of Schapiro and Cox and the SEC headquarters - and, if possible, a nice group photo of all the Wall Street executives who were responsible for creating and selling toxic securities to foreign banks and pension plans, yet who were never charged with any regulatory offenses.
The system exists so openly and operates so brazenly that I doubt that a groundswell of public outrage could change the dynamic. And really, what would we change it to? If a different group took over from the SEC, what would prevent the same thing from happening all over again?
Whenever I look for a good alternative, I find myself going back to the minimalist regulatory structure that we writers toil under. I think the marketplace does a pretty good job of determining who gets read and who gets ignored. The system isn't perfect - I have three terrific novels on Amazon.com that I'm pretty sure only my mother has read, although my lovely wife says she'll get around to reading them someday. Meanwhile, idiotic material like Dow 36,000 somehow qualifies as a best-seller.
In the publishing world, people are free to choose what they want. Why shouldn't financial services be like that?
Does that mean throwing the doors open and letting everybody call themselves financial planners? Actually, that's not so far from what we have now. Layered on top is a lot of meaningless busywork overseen by bureaucrats who are themselves mired in meaningless busywork - made worse by a system that tends to favor the powerful who can pay whatever it takes to tilt the regulatory odds in their favor.
Consumers have the illusion that they're being protected without the actual substance. That entices them to lower their guard when they should be hiding their pocketbooks.
FOCUS ON TANGIBLE
My new regulatory structure would focus on tangible things. Custodians would have to prove that the customer's money is where the account statements say it is. Everybody who charges to give advice and manage assets would be required to do this through one of those regulated custodians. Advisors would have to safeguard any sensitive client data they receive, which increasingly means secure storage on the cloud, rather than in a filing cabinet or lying around the office.
Next, let's make the tort lawyers are our enforcers. Instead of imposing a lot of foolish regulations, why not simply make advisory firms liable for any identity theft losses that their clients incur? That would keep this issue far more top-of-mind than occasional visits by SEC examiners - and it might also mitigate customer losses.
Meanwhile, I have no idea why financial advice givers should have to keep detailed books and records since the only important question to the SEC is whether a customer's money resides with the custodian.
Nor should we require anybody to be a fiduciary if they don't want the role. Let people self-proclaim what standard they intend to live up to - but hold them to that standard in court. That would instantly create a visible differentiation between salespeople and real advisors, and it would save us a lot of regulatory time and energy trying to make these fine distinctions from the outside.
Finally, should we require people that attain a minimum educational standard or should we simply encourage it? Every state should have its own society of professionals who have earned either the CFP or PFS designation; you're either qualified to be a member, or you're not. Consumers can take their financial advice from a neighbor, or their barber, or a person living off the streets. (They could even inflict real damage on themselves and take the advice of journalists.)
Or they could choose to work with a credentialed professional who undergoes some form of peer-review process. Would peer review be a reasonable substitute for the minions who toil away in Washington? In my experience, advisors are much harder on each other and see the failings of their peers much more clearly than any regulator ever will.
SAFETY STANDARDS FOR WALL STREET
I wouldn't give Wall Street a free pass to create toxic products. This new regulatory structure would include investment product safety standards - general guidelines that expose the creator of toxic products to heinous civil remedies. And it would require the firms to stand behind what they sell - in other words, to buy back their toxic sludge at the original selling price if a judge rules that the products were not created with the best interests of the consumer in mind.
But on the advice side, caveat emptor! Consumers would know that nobody is monitoring the quality of advice they receive. So if they walk into a brokerage office and put their trust in a person who refuses to sign a fiduciary oath and has sales awards all over the wall, why would that be any different from them putting their trust in their brother-in-law who happens to have a hot tip on sovereign debt issued by the government of Zimbabwe?
Yes, there are endless problems with letting the free markets decide who wins the business (and loyalty) of retail consumers, just like there are grave problems with a marketplace that allows people to ignore my novels.
But this new structure would have the huge advantage of making the whole regulatory capture issue kind of irrelevant. In addition, it would cost a lot less, make everybody's lives easier and allow advisors to spend more time with their clients.
Meanwhile, those lobbying and law firms would have to find something else to do with their collections of former SEC bureaucrats. Maybe they could take up writing.
Bob Veres, a Financial Planning columnist, publishes Inside Information at bobveres.com and co-produces Bob Veres' Insider's Forum, Sept. 17-19 in Dallas. Post comments on this column at financial-planning.com or email them to bob@bobveres.com.
