Of all the silly things said in defence of active fund management and conflicted financial advice, I wonder whether the silliest words of all emanated from the mouth of Gary Cohn, the new director of the White House National Economic Council, the other day?
In an interview with the Wall Street Journal about the fiduciary rule, Cohn is quoted as saying that the rule was “like putting only healthy food on the menu, because unhealthy food tastes good but you still shouldn’t eat it because you might die younger.”
I say silly, but only in the sense that Mr Cohn was shooting himself in the foot. The analogy is, in fact, very appropriate.
The best response I’ve read to his comments is by Ben Edwards, a professor at Barry University in Florida, and a renowned authority on financial regulation. Writing in the Washington Post, Professor Edwards says this:
Opponents of the fiduciary rule often repeat the tired talking point that it would limit consumer choice. This is not true. Consumers can still make the choice — on their own — to pursue unwise investments. The rule simply limits the abilities of financial advisers to push those investments. In Cohn’s food framework, it forces financial advisers to behave like nutritionists, giving clients the truth instead of pitching an alternative-fact fantasy diet of burgers, fries and sugary shakes.
Properly understood, Cohn’s analogy provides a framework for understanding why Wall Street now sells financial junk food: Today, financial advisers enjoy the flavours while savers suffer the side effects. Financial advisers relish selling high-fee mutual funds and other alternative investments because they kick more money back to them. Some underperforming investments — such as non-traded real estate investment trusts — divert 13% or more to fees, even though it’s hard to imagine retirees salivating at the chance to hand that much money over to financial middlemen for an underperforming investment.
Throwing this feast for financial advisers leaves investors with scraps. Cohn’s predecessors found that conflicted advice generated more than $17 billion in excess costs for retirees annually. On average, this means that retirees run out of money five years sooner than if they had not received conflicted advice. Cohn’s admission that the advisers serve up “unhealthy food” essentially admits that the billions in costs are real. But Cohn may not care as much because costs for investors are revenues for investment banks and broker dealers — such as Cohn’s former firm Goldman Sachs.
Cohn’s food metaphor also helps explain why economic research has found a correlation between a country’s bloated financial sector and sluggish economic growth. By wasting money on middlemen, investors struggle to put their savings to work funding opportunities and helping to grow the economy. If too many financial middlemen uselessly trade between themselves and extract fees, economic growth slows. Money stays inside the financial sector and never makes it out to fund projects in the real economy. The fiduciary rule offered a chance to put Wall Street on a diet and let honest advice counteract the dangers posed by too much finance.
Bravo, Professor. You’ve hit the nail on the head. The financial sector has an obesity problem. It’s grown so big it’s putting the health of the real economy in danger. It needs to shrink massively and get back to what it should be doing — namely, providing financial consumers with genuine, net-of-fees value.
Instead it continues to flog consumers expensive, heavily marketed investment products that are just as damaging to their financial health as deep-fried Mars bars are to their physical health.
This is an issue that investors, advisers, regulators, civil servants and politicians should be taking far more seriously than they currently are. And yes, that includes you, Mr Cohn.