In Soviet Russia, Investments Shop You

The inestimable Matt Levine has, as usual, an astute analogy:

A brokerage is an investments store; you come into the store to browse for investments to buy, and the friendly helpful salesperson steers you to some good investments. If it turns out that the friendly helpful salesperson was just steering you to the investments that paid her the highest commissions, knowing full well that they were terrible for you, then you’d have some reason to feel aggrieved. But you cannot expect her to be your full partner in investing, your trusted adviser who always looks out for you. Her job is to sell you investments, and she gets paid each time you buy an investment.

One thing I like about Matt Levine is that when he gives a description like this, he clearly acknowledges that this is the way it is because of law, policy, and custom. He happily acknowledges it could be different, even if he doesn't think that's a good idea.

There are people who are supposed to be trusted advisers! They are called “investment advisers,” and they are different from brokers, and they are held to a higher and more fiduciary-like standard, and they generally get paid on some sort of fee basis for giving you advice rather than on a commission basis for selling you investments. And lots of people are dissatisfied with this system and want the brokers to be regulated more like advisers. And I suppose that there is some case for just banning retail brokers and requiring anyone who sells investments to retail customers to be a fiduciary adviser, but there are some good arguments against that too—it might make investing more expensive for small investors, for one thing—and the Securities and Exchange Commission has never been all that into it.

However, I wonder if he missed an alternative possibility this time. Why should stockbrokers promote securities at all?

(I have a hazy idea of what a stockbroker is, truthfully. When I want to buy securities, I go to Schwab.com. Is that a stockbroker? I assume stockbrokers are brokerage websites for non-Internet-users or, alternatively, for investors who want securities more sophisticated than the ones I buy on Schwab.com. I think my mom had a stockbroker at some point. He sounded like a rapacious dude.)

If I walked into an investment store, I would want them to hand me a copy of the National Harmonized Catalog of Securities and let me browse quietly. Maybe they could answer questions if they were a high-end investment store. I would want them to answer truthfully, just like I would want a restaurant to answer truthfully when I ask "does this have pork?"

The problem with banning advertising is that it deprives consumers of potentially useful sources of information (ha). But if I want to see arguments about whether Security A or Security B is best, why would I care what the shopkeeper thinks? I might want to see the best arguments from Security A and the best arguments from Security B, or I might want to consult an external expert. So sure, let companies plaster the subway with advertisements for their stocks. And let's make the investment stores into spartan, Eastern bloc-style ration shops.

(I do not actually endorse this as a sincere policy recommendation--I have no expertise here)