Regulations in the Financial Industry are Necessary Burdens

Quoting from NPR’s article : House Passes Bill Aimed at Reversing Dodd-Frank Financial Regulations

“Hensarling’s nearly 600-page bill would defang Dodd-Frank by repealing the so-called Volcker Rule, which prevents government-insured banks from making risky bets with investments. It would also scrap a requirement that retirement advisers put their clients’ interests ahead of their own, which goes into effect on Friday.

Perhaps the biggest partisan flash point — the bill aims to scale back the authority of the Consumer Financial Protection Bureau, or CFBP, to regulate large banks and payday lenders.”

I’ve said it before, and I will say it again.  THIS IS A BAD BAD IDEA.

The financial industry is not going to self regulate.  If the world learned anything from the subprime mortgage crisis, it’s that the Financial Industry is going to do whatever makes the most immediate money.  Period.

But on a personal note, let me ASSURE you that the financial professional that you deal with for your investments is just a sales person.  He or she was hired solely because they are good at sales.  They would be just as good selling waffle irons or cars.  They have the barest, sketchiest understanding of the financial instruments they claim to advise you on.  They only know how to sell it.

And worse than that, they THINK they do understand.  If there is a financial planner who reads this, they will assure me that this does NOT apply to them. They have letters after their name because they passed tests.  NOPE.

The people who build the financial instruments that the sales person you deal with sell, they understand it.  Mostly.  But they are not interested in you.  They are interested in creating a product that is easy for the sales person to sell to you.

It really doesn’t matter if these are individual financial investments or large bank investments.  The ABSOLUTE key to the instrument they are designing is HOW EASY IS IT TO SELL.

They want to make money.  They are NOT worried about your financial future.  They are NOT worried about the economy except how it will effect their particular products financial appearance.

They need the product to look good.  That is why the subprime mortgage thing happened.  They took a thing that is risky as hell but makes a decent amount in the short run, and repackaged it in a way that is easy to sell.  HIDE the moving parts, hide the risk – sell the numbers that look good.

So smart people create a product that is easy to sell and hides all the working parts, marketing people learn enough to come up with a sales pitch.  They then teach sales people how to sell the product without spending too much time actually explaining the product.  And the buyers buy that pretty pretty number that sits on top of every sales pitch.

I dealt with these financial professionals from a home office for many years.  The number of times I explained to highly successful sales people how the product ACTUALLY WORKS was astounding.  They don’t need to know how it works to sell it to you.

In the 90s nearly every insurance company in the country was the subject of a class action lawsuit for their sales practices.  For overselling the future values and benefits of universal insurance.  That is what self regulation is – paying out lawsuits is negative feedback.  The industry should self correct.  But No.

They are still selling universal insurance as an investment.  And the sales people still don’t understand what they are selling.

Do not doubt that they will repackage those subprime mortgage bundles and sell them again quite successfully if we deregulate.  Because they have very very pretty numbers on top of an opaque package that buyers don’t understand.  Even bankers.

Financial Services Companies don’t want products that will benefit the buyer. They want products that are easy to sell. It’s not that they are against benefiting the buyer.  But that isn’t their focus and if they aren’t regulated to consider it, they won’t.  Making money is their focus.

Regulations are cumbersome and expensive for the financial industry.  But let me assure you.  They work.  They force the industry to consider the benefit of the buyer.  They limit their greed.

DO NOT LET THEM do this.

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