This blog is written weekly by Dock David Treece, a registered investment advisor with Treece Investment Advisory Corp. It is meant to share insight of investment professionals, including Dock David and his father, Dock, and brother, Ben, with the public at large. The hope is that the knowledge shared will help individuals to better navigate the investment world.

Thursday, September 16, 2010

The Small Investors Discrimination Act of 2010

Leave it to a Democratic-controlled Congress and a Democratic White House to enact policies to hurt the working man. Thanks to the “Law of Unintended Consequences” recent shifts in public policy have resulted in some surprising consequences for small investors.

Due to increased regulation and added bureaucracy, the costs of doing business (for investment firms especially) have been rising of late. One result is that many firms have taken steps to avoid small investors. Firms simply can’t create sufficient revenue from such small accounts to justify the increased costs of catering to that market segment.

According to a recent Bloomberg article, Meredith Whitney predicts that Wall Street firms will likely cut approximately 80,000 jobs over the next year and a half. This comes on top of the fact that banks have shed more than 300,000 jobs worldwide since 2008 (Yalman Onaran, Wall Street Firms to Cut 80,000 Jobs in 18 Months, Whitney Says). While the statistics for potential layoffs aren’t yet public, it’s generally safe to say that a good number will come from customer service departments.

A 2009 article from the Wall Street Journal went even further, revealing several changes in Wall Street ritual that encourage the desertion of small accounts. Apparently the standard practice at Merrill Lynch these days is not to pay brokers for accounts less than $100,000 (Evelyn Juan, Firms Push Call Centers).

Meanwhile, the same article also presents small examples of changes in firm policy that aren’t particularly friendly to the less affluent. Case in point: Bank of America used to assign personal bankers to clients with more than $100,000 in assets with the bank; that minimum has since been raised to $500,000.

The irony, of course, is that the entire reason (read: justification, not logic) for added regulation was to protect small investors. Instead, it seems, these folks will be pushed out of the markets altogether. And it’s all thanks to the Democratic powers-that-be, supposed advocates of the working man.

Don’t think that the Democrat Congress and the Obama White House don’t know what they’re doing. They do; it’s standard operating procedure. One the one hand they sing the praises of the American working man, going so far as to pass a wildly unpopular Healthcare Bill as a blue collar pick-me-up. On the other they are trying, directly and indirectly, to evict small investors from the world’s financial markets.

In the mind of the Democrat politician small investors obviously lack the education or expertise to handle their own healthcare, much less operate motor vehicles at a safe speed. If so, they must also be simply too stupid to make decisions about investments, too easily tricked or fooled. Like defenseless snail darters, they must be protected.

But all the D.C. Democrats, it seems, forgot about one small, under-represented group: financial firms. In an industry so saturated with regulation that even small firms typically employ a small platoon of compliance consultants and attorneys, the success of any new policy is predicated entirely on the consent of the governed – namely investment firms and their associated persons.

Just as the regulatory body for brokerage firms (FINRA) has been recently reaching beyond its jurisdiction to scold firms over outside operations, the government seems to have forgotten who pays the bills. Take the case of FINRA, which is funded entirely by securities firms, acting almost like a union.

As is the case of any new tax, the immediate reaction of the taxed is to look for methods of avoidance. When new regulations are enacted and firms are placed under increased scrutiny, their initial reaction is rarely full compliance, as regulators intend. Instead, it is to seek out cost-effective solutions; a balance of cost and compliance.

In the same way, the US government ought to know by now that policy enacted without the support of those affected will be met with resistance or subterfuge. Maybe one day politicians might finally learn not to bite the hand that feeds them.

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