Death by a Thousand Paper Cuts: The Slight, but Constant Chilling Effect of Overregulation

It goes without saying that the financial crisis of 2008 and 2009 has changed the way that we do business in the securities industry, none-the-least of which is the creation/adoption of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank Act, as it is referred to, required the Securities and Exchange Commission (SEC) to, among many other things, study the need for a new, uniform federal fiduciary standard for brokers and investment advisors. Despite this requirement for the SEC, the Obama administration’s Department of Labor (DOL) announced its own fiduciary rule. 

A fiduciary standard that requires financial advisors to put their individual client’s interests above their own, an idea that, in theory, is perfectly sound and desired by all.

Unfortunately, these laws have a chilling effect on the growth potential of small businesses that have to add cost and infrastructure to comply with these laws. Instead of the laws being tailored to them based on their size, these broad, sweeping laws favor the massively large companies and thus, are barriers to growth and to entry for entrepreneurs. Someone who wants to start in this line of business today would have much broader staffing requirements than they formerly needed and in turn require much greater initial capital.

I have created dozens of companies, ranging in size from 10-100 employees, and employed hundreds of people, who have supported thousands of family members, and I have to ask:

“What are we doing, America?”

The DOL fiduciary rule should be rescinded. Regulation in general puts a drag on businesses and we need to trim back the kudzu of regulation that continues to choke business growth in this country.

Overregulation is a problem in my industry. As someone who has lived through the changes these past 40 years and witnessed additional regulation permeate the environment, I can identify at least four reasons why this particular regulation is bad policy.

1. The rule was unnecessary. The Obama administration claimed that the new rule was needed to stop advisors from talking “responsible Americans into buying bad retirement investments,” but they produced no evidence of this activity being widely practiced in the industry, much less harming the typical investor.
2. One-size does not fit all. There are four sets of rules that dictate what advisors can do, and they’re all somewhat different because there are different types of advisors. A one-size-fits-all approach is bound to result in less investment advice for the average investor as advisors err to the side of caution under their new legal standard.
3. It impedes creation. These types of rules frequently result in less competition for larger companies because the compliance costs are so burdensome. They serve as a barrier to entry for new firms, and the lack of competition advantages the largest firms affording them leeway to charge consumers higher prices. Obviously, this sort of outcome is not a win for the average investor – the largest firms end up focusing on the wealthiest investors.
4. It doesn’t give investors enough credit. The rule assumes that people can’t inform themselves and make their own decisions, thus expanding the need for federal bureaucrats to micromanage citizens’ behavior. There’s absolutely no reason to think that a very simple disclosure rule wouldn’t be a much better approach to helping people than a top-down rule.

These types of rules have grown more pervasive in the financial industry during the last few decades, and most people probably don’t realize how many rules the federal government imposed on financial firms prior to the 2008 crisis. The weight of federal regulation had become overbearing, and the result was that fewer smaller firms stayed in the market, leaving the consumer with fewer choices.

The rules increased consolidation and concentration in financial markets, and that’s bad for consumers and the market, in general. The Dodd-Frank Act doubled down on this approach, and it’s doing enormous long-term damage.

A small business person or entrepreneur with a fresh start-up is going to look at the amount of regulation, become despondent and possibly choose not to take the risk of starting a company. After all, we entrepreneurs are risk takers, taking calculated risks with our own capital to try to make an idea come to fruition, do something better, or with better service and that usually means the new hiring of people. Being an entrepreneur is about business/job/opportunity creation.

And as for the increased costs, these costs will be passed on to the client. Thus the clients who can’t afford expensive advisors may lose out completely.

Jeb Hensarling brought up an interesting point in his piece yesterday in the Wall Street Journal titled, “How We’ll Stop a Rogue Federal Agency.

“It requires lenders essentially to read their clients’ minds, know and weigh their clients’ comprehension levels, and forecast future risk.” - Jeb Hensarling, WSJ

While he’s not referencing this specific fiduciary rule, he makes a good point addressing the problem with this “best interest” standard.

Are all regulations bad? Of course not. There definitely is regulation that is necessary, but this isn’t necessary. Finally, you have to ask the question, “does the law actually fix the problem?” In my opinion it does not.

In upcoming pieces I’ll discuss Dodd-Frank and the Consumer Financial Protection Board (CFPB) and the deleterious effects they have had on the growth in my industry. Comment below or message me if there is something you’d like me to cover in that next installment.

Anthony Saliba is the founder of Saliba Venture Management, LLC, SalibaCo, LLC, and Fortify Technologies, where he is currently the CEO. Mr. Saliba is also the founder and owner of International Trading Institute, founder and partner of Efficient Capital Management, and co-owner of Elite Football League of India. Mr. Saliba is a director on several boards, including the Heritage Foundation. Among his many other accomplishments, Mr. Saliba was a Specialist on the floor of the CHX, served on the board of the Chicago Board of Options Exchange, and is the author a new book that hit #1 in New Releases in Options Trading on Amazon: Managing Expectations: Driving Profitable Option Trading Outcomes Through Knowledge, Discipline, and Risk Management. You can find him on Medium or Twitter @ajsmarketwizard.