Many years ago a study claimed that New York heroin addicts were stealing $4 billion of private property per year. This caused a big outcry and a demand for more police. When someone asked how that number was derived, the study authors said that the average addict spent $30 a day on heroin and that there were 100,000 addicts; which added up to $1.1 billion. And since stolen property can only be fenced for a quarter of its value that means at least $4 billion of property was originally stolen. The police departments began a hiring spree based on the crime wave trumpeted in the media.
The authors were then finally asked, “How do you account for the fact that only $200 million in stolen property is reported to police and insurance companies each year?” The claim that there was a $4 billion addict crime wave quickly faded from the news. The magical $4 billion number was created by bad extrapolation based on flawed assumptions.
The main reason there are no longer Saturday morning cartoons is because a quarter century ago Texas Congressman John Wiley Bryant wanted children watching more educational programs on TV. By the time regulators had stopped fiddling with the Children’s Television Act it had become so onerous that networks simply blocked out their least profitable time slot with the lowest cost content. The result: Educational programming that few children watch and Bugs Bunny is now homeless.
In 2007 the State of Washington said employers could no longer look at job applicant credit scores as a hiring criterion because they said it discriminated against African-Americans and the young in general. The result? Companies simply hired fewer of each group to lower the risk of getting an employee with a low credit score.
In 2015 the Department of Labor published changes to the definitions of what is a fiduciary, saying that commission-based practitioners were abusing consumers and that this abuse was costing consumers $17 billion per year. Both of these claims were headlined by the press in story after story. However, the $17 billion was a made-up magical number created by extrapolating the investment performance of a group of employees at one college where the only choices were do-it-yourself or use a broker (http://www.nber.org/papers/w18158). In addition, not only didn’t any of the independent studies listed by the department conclude that a fiduciary-only standard was better or that consumers were being harmed by the current regulatory system, even the DOL’s Phyllis Borzi was forced to admit that “none of this research evidence necessarily demonstrates abuse.”*
What were the unintended consequences of the DOL’s actions? Many financial advisory firms and broker/dealers raised their minimum account size and this worked to deny financial services to the lower net worth clients the DOL was trying to protect, and a few providers that catered to the middle class got completely out of certain businesses with fiduciary risk altogether. The ultimate result was less professional advice available to the part of the public that most needed it, and the shifting of hundreds of millions of dollars—money that would have ultimately gone to consumers—into attempting to comply with a flawed rule.
Many of the rules passed in every area of life by politicians and regulators are hastily conceived reactions to the outrage du jour and possible consequences are almost never examined. One of the reasons for the lack of analysis is that by the time a proposal gets close to a vote or implementation there is a steamroller effect going on that paves over any opposition. However, bad rules can often be modified or kept from surfacing if action is taken early on—when the proposed law is still in committee or when the regulation is being created. At the first sign of danger our elected officials need to be made aware of possible results that they are not yet seeing.
The reality is that the agent in the field does not have the time to keep on top of all this, which is why membership in industry organizations is so important. By supporting the National Association of Insurance and Financial Advisors, National Association for Fixed Annuities, National Association of Professional Insurance Agents, Society of Financial Service Professionals and others, agents have someone working for them that can explain to politicians about the law of unintended consequences.
* Testimony of Phyllis C. Borzi, Assistant Secretary of Labor, Employee Benefits Security Administration Before the House Committee on Education and the Workforce, Subcommittee on Health, Employment, Labor, and Pensions. 26 July 2011 http://www.dol.gov/ebsa/pdf/ty072611.pdf.
