Washington’s Financial Planners


Last week Vice President Joe Biden proposed two new rules designed to help Americans avoid bad 401(k) and IRA investment advice: “If the rule is adopted, it would put in place safeguards preventing investment advisors from slanting their advice for their own financial benefit. [1] Investment advisors also would be required to disclose their fees, and [2] computer models used to offer advice would have to be certified as objective and unbiased.”

Biden’s proposal seems to make sense at first glance. What’s the problem with financial planners disclosing how they earn their money? It’s like reading the package before you purchase a product in the grocery store. However, there at least four serious problems with the certification requirement.

First, who exactly is going to certify computer models as objective and unbiased? In the end, Washington must either do the certifying or it must oversee those who do. With a financial track record that includes the likes of social security, Medicare, Amtrak and the post office, why would any reasonable person expect to receive better financial advice when bureaucrats are injected into the mix?

Second, a certification requirement could introduce a liability nightmare. Individuals whose investments lose value could claim that they acted on advice inconsistent with certified models. Financial advisors could find themselves at the mercy of juries often hostile to Corporate America and Wall Street.

Third, a certification requirement would likely result in a smaller number of highly similar computer models. There are sound investment principles of risk-reward and diversification, but financial advice is an inexact science, and there is no holy grail. In the end we must educate ourselves, make our own choices, and accept responsibility for the consequences. Well-intentioned government oversight would only limit our access to a wider array of financial recommendations.

Finally, the logic behind both provisions is that conflicts of interest among financial advisors impair the recommendations they make to their clients. But Washington has its own conflicts of interest. Bureaucrats might favor models that encourage investments in companies in which the federal government has financial or political interests like General Motors or General Electric. They might frown on models that “bet against the Fed” such as diversification into gold and silver.

Like most leftwing meddling into the economy, this proposal assumes that government is honest, fair, efficient, and objective, while those in the private sector simply cannot be trusted. Moreover, it assumes that the profit motive, by definition, creates a conflict of interest. To be frank, I don’t care how much my financial planner makes. All things equal, I want him to have some skin in the game and profit proportionally to the quality of advice he gives me. The profit motive creates more of an incentive for performance than it does any conflict of interest.

There’s an irony here. You may recall that President Bush’s proposed social security reform included an option to invest a small percentage of one’s social security contributions into a limited array of market investments. The left rejected and defeated this proposal, arguing that social security should be secure and guaranteed, and the government should not become entangled with investments in the stock market. Besides, individuals are free to set up their own IRA’s and invest as they wish. Biden is singing a different tune now.

The problem with Biden’s proposal is the same as with many of the ideas that come from the left—(presumably) unintended consequences. More times than not, the increase in the bureaucracy and the perverse incentives created when Washington inserts itself into the private affairs of individual citizens far outweighs any benefit derived from the regulation. If Biden wants to promote a secure retirement, he would be well advised to fix social security and keep his hands off of private investment decisions.



  1. kicker  •  Mar 2, 2010 @9:14 PM

    Social security generates almost no returns based on current payouts and the politicians can play with this whenever they like. If Obama had any guts he’d put a plan on the table to reign in social security.

  2. Nutmeg State Conservative  •  Mar 2, 2010 @9:19 PM

    This is simply Obama’s chance to get a foot in the door because he is drooling over all the money that is being denied him. Once they get the door open, they will claim that it is just to much of a mess (ie-healthcare, banks, GM, etc) to be left to the privatr sector and an attempt at Nationalization will ensue.