Forging a Public-Private Partnership to Promote Investing
By working together, government and the financial services industry can set clear standards of conduct.
Too often in policy debates around investing, the financial service community paints the national government as working against it. Complaints that the government is
seeking to curtail innovation or to limit the access investors have to certain tools and investing vehicles abound. Both government and industry claim to be on the side of the investor--and yet seem to do so at each other's throats. A new paper by Aron Szapiro, our head of policy research, explains why that doesn’t need to be the case.
For decades, the U.S. government has actively encouraged investing. It has used three primary tools:
This model is fundamentally based on one of public-private partnership: the government itself isn't selling stocks or offering retirement plans to the general public. Instead, it has established the rules by which the investing industry exists and is able to offer investments to the public. Without current government programs--like tax deductions for 401(k) contributions and fee disclosure rules--the industry, and the base of investors, would be far smaller and riddled with unseen, unknown risks.
Tax incentives, disclosures, and professional guardrails easily become taken for granted, though. They fade into the background because they are an inherent part of the act of investing itself in the U.S. The partnership between government and industry becomes hidden along with it, and there's a tendency to focus on the smaller areas of disagreement instead of the broader alignment of interests to promote saving and investing.
Recently, that's been changing--and with good reason. As Aron argues in his paper, tax incentives and disclosure rules have run their course. Investing has grown tremendously over the years, in large part because of these efforts; however, future progress is going to come from new types of government action. Roughly 50% of Americans still do not save and invest at all, and many that do have meager balances that are unlikely to support their retirement, or any other major future need.
So what's next? To further promote investing, the government is using the third tool in its toolbox: regulation of conduct--the DOL's fiduciary-rule-in-limbo, and the newly proposed SEC rules. The government has paid the least attention to this area, and the resulting mishmash of standards of conduct is confusing to many everyday investors. Investors and industry alike should welcome attempts to clean up this situation.
What does this mean for investors? It means an active effort to create transparency and coherence in the advising industry. It's one we should all applaud and support (and work to guide and shape with investor-focused feedback to the SEC, DOL, and yes, to advisors). It also means that further tax incentives--already generous and well-known to most Americans--are unlikely to get more employers to offer retirement plans or more people to save in them. Continued disclosure is vital, but all but the most expert investors (including many readers of Morningstar.com) do not read them, and that is unlikely to change. The "action," now and in the near future, is likely to be squarely focused on standards of conduct, and it'll be far more effective if our advisors and other industry actors see the government as a partner who likewise seeks to promoting savings and investing.
What does this mean for Morningstar.com readers in the financial service industry? The stark truth is that standards of conduct are a confusing mess, and it's in the interest of investors and the industry to fix it. To help investors succeed, the financial service industry should better understand the goals and tools of government and work together with the SEC (and perhaps again the DOL) to rationalize the scattered regulations and standards of conduct for investment advice.
Whether you are an investor, a financial service professional, or both, you can learn more about the tools the government uses to promotes investing, and how regulation of advisor conduct fits into the broader set of efforts. Read Aron's new paper, Bridging the Investing Gap: Why Refreshing Policy Can Help All Americans Build Their Financial Futures.
Aron's paper is part of the Investor Success Project, a new research initiative at Morningstar to better understand the tools and approaches that can help investors succeed at their financial goals. You can learn more about the project here.