There is a battle occurring between regulators in the investment industry and most individuals are completely oblivious to both the proposed processes and the problems with the current patchwork system of financial industry oversight.
For years I’ve written about the different ways in which people who hold themselves out as investor-helpers are regulated. Stockbrokers, financial planners, investment advisers, trust department employees and insurance salesmen are regulated by a number of different—and competing—organizations, each with its own requirements.
Each regulatory authority thinks its systems and processes are better than the others. Under the guise of improving overall regulation and seeking consistency, the various regulatory entities are jockeying for more power and larger budgets.
The Financial Industry Regulatory Authority (FINRA,) the self-regulatory organization that oversees the stock brokerage community, accuses the Securities and Exchange Commission (SEC) of failing to inspect its advisers frequently enough. The SEC argues that FINRA sanctions against brokers are easily concealed and are so financially insignificant they are simply considered a cost of doing business.
Other people offering investment help are overseen by federal bank examiners, state securities regulators, state insurance commissioners or others.
When you sit down with someone seeking to sell you investment assistance of some sort, you likely have little or no idea about the differences between these umbrellas and under which that person falls.
Nor do you know if, like Bernie Madoff, the person never bothered to register with the required regulatory authority.
The current system is dysfunctionally inconsistent, poorly used and widely misunderstood.
The misconception is that US investment and securities regulations are designed to protect investors. Instead, the system is primarily designed to inform investors. Our systems of protection are based on disclosure, assuming that individuals, acting in their own interests, will seek and use these disclosures to evaluate both investments and the people selling them.
Except that few people do it, rendering our current investor protection system functionally impotent.
Additional disclosures or the reassignment of regulatory responsibilities won’t provide any additional protection to individual investors unless they use it.
As a result, everyone who is touched by the financial industry will experience some sort of change, except the people the changes purport to help: the individuals.
Investors are too lazy to research advisers or just don’t care. Or they are so impressed by the way things look that they never look inside the package.
Investors ignore the disclosures already available to them. Few people understand the difference between suitability and fiduciary. People don’t read prospectuses. Too many people don’t even carefully review their monthly statements.
Until people put as much effort into researching their investment choices as they do planning a vacation or evaluating a cell phone contract, most regulatory efforts are worthless. Too many investors’ due diligence is limited to asking “how much will I make?” or “how much did it make last year?”
More disclosure isn’t going to protect anyone, except whichever existing regulatory organization ends up with someone else’s responsibility—and their budget.