Must-Read: Barbara Roper: It Isn’t the Money, It’s the Economics

Must-Read: Barbara Roper: It Isn’t the Money, It’s the Economics: “If people actually take time to read the study, which Litan coauthored with Hal Singer of the Progressive Policy Institute…

…what is most shocking… is just how poor the quality of the analysis is…. Litan and Singer’s argument hinges on… 1) that industry will follow through on its threats to stop serving smaller accounts if the rule is adopted and 2) that investors will lose access to important benefits… as a result of losing access to human advisors. The first… is based on a fundamental error…. In building their case, Litan and Singer rely heavily on a 2011 Oliver Wyman study, also funded by industry rule opponents…. That study assumed that commissions would be prohibited and concluded that small savers would lose access to advice if a ban on commissions were adopted. Litan and Singer chide the Department of Labor for its ‘too facile’ dismissal of the study ‘on the grounds that brokers can continue collecting commissions,’ noting that ‘only firms, but not individual brokers, would be able to receive commissions’ under the reproposed rule. It is difficult to say where they got this notion….. It is a verifiable fact that, under the rule, individual brokers as well as broker-dealer firms could be compensated through commissions if they abide by the terms of the best-interest contract exemption….

Litan and Singer claim, mistakenly, that “the entire evidentiary rationale for the rule … depends on individual brokers no longer receiving commissions.” On the contrary, the regulatory-impact analysis is premised on the notion that, if brokers serve their clients under a best-interest standard and place reasonable restrictions on practices that conflict with that standard, it will encourage recommendations of lower cost, higher-quality investment options. As a result, investors who turn to brokers should see higher returns. But that has nothing to do with moving brokers away from earning commissions, as Litan and Singer mistakenly assume. There are any number of other problems with the study, but these three go to the heart of its credibility, or lack thereof…

October 6, 2015


Brad DeLong
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