Tuesday, March 18, 2014

Unintended Consequences

While the US Department of Labor grapples with how it will propose new rules to govern retirement advice, a number of countries oversees are coming to grips with the unintended consequences of rules they have already enacted.  One country, the United Kingdom, is debating whether its ban on commissions has created an "advice gap," where some wealthy clients retain access to financial advice and others go without because they industry business model does not work for small savers.

Late last month, the CFS Institute came out with a global study looking at the effect of a ban on commissions worldwide.  The study endorses greater transparency and notes that:
One concern raised in markets where the decision has been taken to ban inducements is a fear that such a move risks stratifying the investing public into the few that can afford investment advice, versus those who cannot afford, or are averse, to pay up-front for advice. Larger financial institutions appear to be moving away from providing advisory services to smaller clients because of a lack of economic incentive to serve them. According to 46% of survey respondents, the main consequence of banning commissions is that distributors will continue to offer advice, but will shrink the product offerings to those they continue to receive fees upon.
Few would argue that investors need strong protections. Experience in other countries suggests, however, that the price of new protections could be no advice at all. That is too high a price to pay and regulators must walk a fine line.

Women in Finance

Newsday is running an op-ed about how to get more women to the top of business.  A key piece of the author's answer?  More financial literacy education.
Finance shouldn't be a foreign language. Beginning in middle school and continuing in high school, girls need to be taught basic financial concepts. They need to learn about interest rates, credit scores, fixed income, discretionary costs and other economic realities such as compound interest, tax-deferments, insurance copays, deductible expenses and so on. If nothing else, it will help them choose a health care plan.