Regulating financial advisors will eventually have the same effect that rain has on the availability of cabs in Manhattan.
A recent report in Businessweek showed that when it rains in Manhattan, the demand for cabs rose by 4.8%. A pleasant 3-block walk on 5th Avenue is not the same on a rainy day.
On the supply side, 7.1% fewer cabs were available while it rained. Why fewer? Because the drivers did not like the circumstances well enough to do their job. Short rides, slower traffic, crazy pedestrians, and a greater likelihood of accident contributed to the decision to pack it in and wait. Despite higher demand, lower income.
13% more demand than supply. Some people must walk in the rain or wait a long time. Urgency is the obvious but not key variable.
Same thing with regulated advisors. Eventually there will be more demand and less supply.
The first stage will reduce the number of advisors. Not a big thing really, there are some that should not be doing what they do now. Where it will become a problem is that fewer skilled people will choose the profession and the skilled advisors that remain will choose to take on fewer, easier to deal with, or more profitable clients.
Ultimately there will be some people who discover the need for a planner or advisor, but cannot find one to accept them as a client. What is the cost to that individual in terms of time, excessive costs and losses resulting from weak decisions?
Some regulation is required, but too much costs all the people in subtle, often invisible ways. I wonder if the cost of additional regulation is greater than or less than the losses that would result without it. I wonder more if anyone has ever tried to know that number.
Regulation is not restricted to financial advisors. It is everywhere. It consumes resources in often remarkable ways. Do we need as much? I don’t know, but I am reminded of a Peter Drucker thought.
There is nothing quite so useless, as doing with great efficiency, something that should not be done at all.
If regulators were ever held to account when something happened that they were nominally responsible for, I might have more sympathy for their existence. They are never accountable for their failures. Consider the SEC response to the tips they received regarding Bernie Madoff.
The helicopter government problem diminishes the ability of those they regulate and of those that would use the regulated services.
Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. Contact: firstname.lastname@example.org