Outcry over “market manipulation” gives Liz Warren and other opponents of the Wall Street status quo all the rhetorical firepower they need to interfere with the industry.
Never mind the endless Robinhood debates over whether the free trading platform was right or wrong to initially let clients crowd into widely shorted stocks and then slam the door.
Their risk management team made the calls. Presumably they got in touch with the relevant regulators and took their advice.
Either way, they’ll pay a fine if they didn’t follow the proper procedures. That’s how the industry normally works.
But these aren’t normal times. We have a new administration with different priorities, listening to different voices.
Many of these voices mean well, but they’re a little . . . confused.
The rhetoric has reached the point where the head of the NYC Young Republicans is leading anti-hedge-fund protests while high-profile Democrats argue that day traders need absolute freedom to win or lose.
The one thing they all agree on is that Wall Street’s casino is biased against “the little guy.” They just can’t figure out who needs to be protected or how to do that without doing harm elsewhere.
Mixed Markets, Mixed Metaphors
We know that the accredited millionaires who can become legitimate hedge fund investors are very different from the people who are squeezing those same funds now.
These traders aren’t ideal advisory clients. We tend to ignore them and their needs.
After all, “the little guy” doesn’t have a lot of cash beyond the funds earmarked for retirement. If you’re an individual investor playing with taxable money, the stakes tend to be pretty small by industry standards.
A shocking number of people in Washington miss that point. They’ve never really shown a strong grasp of all the competing advisory compensation models or the market segments each one serves.
That’s why efforts to increase the regulatory burden on advisors who primarily serve HNW accredited investor types rarely do much to protect the Robinhood trader, much less the truly poor.
Unemployed and desperate people didn’t sign their stimulus checks over to a brokerage account. They used that money to pay the bills.
And most Robinhood traders don’t sign advisory agreements, so disclosure, education and fiduciary responsibility really won’t help them one way or another.
Again, all that paperwork is for a completely different market segment. It’s completely irrelevant here. Anyone who says advisory standards need to change to protect hapless day traders is not arguing in good faith.
Retirement accounts are a special case because this tends to be the biggest pool of liquid assets most households have, and the government’s interest in promoting end-of-career savings has spawned a separate universe of rules.
We’ve all fought our version of the DOL and Reg BI wars, but it really boils down to ignoring the DOL unless you are really hungry to work with retirement plan assets. If that applies to you, you were probably ready for the fiduciary standard years ago.
As for Reg BI, you really only need to demonstrate that you disclosed conflicts of interest and made a good-faith effort to make sure your recommendations were better than just “suitable.”
That’s the safe harbor. At this point, we’re a long way from BI standing for “best interest” in any legally enforceable sense. It’s going to be hard for angry clients to sue under that standard because you didn’t move heaven and earth to give them a perfect experience.
The rule we have now is the result of endless negotiation and delay. Any effort to push the goalposts now will only restart the clock, giving vulnerable advisors more time (probably years) to pivot their operations or target markets out of the way.
Meanwhile, Biden regulators look a lot more interested in the DOL side, where the government has more control.
Almost perversely, loosening the existing anti-ESG rules to allow “extra-pecuniary” recommendations will go a long way toward eliminating fiduciary headaches.
Worried about being sued because your fund menu wasn’t absolutely perfect? Claim that you were blending the investment considerations with squishier subjective criteria and it’s hard to prove you wrong.
This is the immediate priority for new SEC leadership. They aren’t interested in going after advisory practices or even discount brokerage apps.
Of course they’ll enforce the rules they already have, but that’s why compliance officers exist in the first place.
Bring On The Rhetoric
Congress rarely has much luck creating regulations in any event. While they have the power to make new law, most industry paperwork is at least partially self-generated via a largely friendly SEC as well as FINRA.
The SEC is the only body in Washington that really knows what we do. That’s because they work closely with the industry and are often drawn from industry people.
They work largely in what they see as the industry's long-term interest. If that vision conflicts with the world we see, we let them know in forceful terms.
When the SEC (unlike DOL) creates a rule, political appointees may get the process started, but they’re rarely around to gauge the results at the end.
Everything else is rhetoric and theatre.
A lot of bankers learned to hate Liz Warren before the 2008 crash, back when she was just another academic arguing that bankruptcy needed to remain an option for consumers who got in over their heads.
Our hedge fund loved her because we liked healthy household balance sheets and wanted the banks to think beyond the next credit card statement. But that was a long time ago.
Now she’s taken to trashing Wall Street whenever she gets a chance, most recently going after Robinhood for helping to, in her words, “rig the system” when individual investors finally won a round.
Robinhood gave those day traders a place to pool their tiny positions into something more meaningful. They aren’t actually her people. She’s just looking for a rhetorical weapon.
Should the market rules be revised to protect Robinhood traders? How does that happen? The most obvious options would be to restrict their freedom to trade various classes of securities, possibly expanding the definition of accredited investor or something like that.
Maybe you’d need $1 million to trade penny stocks, certain options strategies or even buy on margin. But I don’t think so.
Recent decades have proved that the long trend is toward democratization in the market. Esoteric and arcane assets ultimately get scaled down to the retail trader.
Someone always finds a way. The evolution of trading from full-service commission brokerage through the discount platforms and now the no-fee apps proves that.
Even if a few apps go wrong and get legislated or regulated out of existence, stronger versions will ultimately take their place.
That’s the real signal behind all the Washington noise. Technology finds a way. The casino keeps innovating. There’s always a new game.
Self-directed traders can play and lose. With professional guidance, the odds get better.
