Regulators
On the surface, the financial services industry appears to be highly regulated. Various organizations (SEC, FINRA, State Agencies) are responsible for protecting your interests from an industry that all too often puts its own interests ahead of yours. However, these organizations have limited effectiveness, for reasons that we'll explain below.
Proof
If you need proof that the regulators are ineffective, consider the following observation that has been made by a small percentage of the media and a few industry experts. Most of the litigation against the financial services industry has been initiated by the Attorney General for the State of New York (Eliot Spitzer). Why wasn't this litigation initiated by the regulators who are tasked with the responsibility of overseeing the activities of the industry?.
Additional Proof
If you need additional proof that the regulatory environment for financial advisors is lax, then:
- Why is there no education requirement to be an advisor, not even a high school diploma? After all, advisors play a critical role that impacts your standard of living and financial security during retirement.
- Why is there no experience requirement to be an advisor, not even a week?
- Why can convicted criminals obtain securities licenses?
- Why can advisors with numerous investor complaints continue to sell investment products?
- Why don't advisors have to disclose their credentials?
- Why don't all advisors act as fiduciaries?
If this isn't a lax environment, what is?
Special Interests
The financial services industry is one of the largest special interest groups in the U.S. It spends hundreds of millions of dollars per year for lobbyists at the state and federal levels to make sure legislation is favorable to the industry and not investors.
Industry lobbyists influence politicians who oversee and fund regulatory agencies such as the SEC. For example, politicians make sure the SEC is chronically under-funded so it has limited capacity to regulate the industry. There are also major conflicts of interest. For example, SEC employees obtain regulatory experience then leave government employment and take jobs in the financial service industry that pay several times more than their previous jobs. They don't want to antagonize their future employers.
This strategy has worked for the financial services industry for 100 years and the reason is simple. The industry is very organized and has virtually unlimited resources. Investors have no equivalent organization with similar amounts of funding. Investors may have millions of votes, but politicians can win those votes and not do what's best for voters. Meanwhile, the industry funds the politicians' ability to win your vote.
Self-Regulatory Organization
Another primary regulator is the Financial Industry Regulatory Authority (FINRA). This organization oversees the securities industry and it is an SRO (Self Regulatory Organization). This means the industry regulates itself. The FINRA is funded by the industry that it’s supposed to be regulating. If you have ever been a plantiff in a FINRA arbitration, you know how one-sided the process can be.
State Agencies
State agencies also regulate advisors who sell investment and insurance products. These agencies share many of the same conflicts that afflict regulators at the national level.
Self Interest
If the politicians and regulators won't protect you from industry practices that damage your interests and the companies/advisors make-up the industry then who will protect your interests? There is only one answer left - you.
Links to Regulators
Go to How to Avoid Bad Advisors / Links to Regulators on the left navigation bar.
