If given the choice, we tend to cheer for the underdog – championing the interests of individual financial advisors over those of their firms, and favouring the innovative startup vs the sclerotic industry behemoth. So, although we sympathize with the plight of the struggling small dealers, the little guy whose interests still need defending is the retail investor.
Undoubtedly, small investment dealers have had a rough go of it over the past few years. Markets have been tumultuous, the economic recovery has been slow in coming and business volumes have diminished as a result. But the answer is not to relax regulation to help small dealers survive.
Let’s not forget that the reason markets have been so rough is that we had a massive global financial crisis. And, at the heart of that event were behaviours that flourished amid regulatory weakness – inadequate transparency, distorting incentives and lax oversight. Surely, the answer to the problem of Canada’s struggling small dealers is not to repeat those mistakes.
For one, it’s a fundamental error to think that regulation should be tailored to the needs of the regulated. Rather, it’s the interests of those whom regulation aims to protect that should be paramount. The clients of small dealers deserve the same sort of safeguards as the customers of large firms.
Second, the existing system already favours large firms, in part because it relies on ever-increasing disclosure to paper over fundamental market failures. The current system allows firms to maintain the fiction that salespeople are advisors, that they act in clients’ best interests and that their interests are properly aligned. Large firms have a clear advantage in producing and managing all of the paper necessary to preserve these myths.
A more candid regulatory environment – one that holds financial advisors to a fiduciary standard and outlaws some of the industry’s perverse, distorting incentive structures – could actually end up favouring small firms by ensuring that advisors can compete on the strength of their service and the quality of their advice, not the efficiency of their compliance systems.
The small dealers that need less regulation in order to survive should be allowed to perish – and the ones that would thrive in more honest conditions should be given the chance to flourish.
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