Many investors are addicted to overpriced financial products sold by conflicted advisors. The products are not the problem. The toxic environment that allows them to incubate and spread is the main source of this dysfunction.
Johann Hari wrote an amazing article in the Huffington Post entitled “The Likely cause of Addiction Has Been Discovered and It Is Not What You Think.” It turns out addiction has a lot more to do with social disconnection than the powerful allure of the narcotic.
In an experiment with rats, it was discovered that isolated rats put in a cage with no stimulation were more likely to choose heroin laced water and kill themselves. Other rats placed in a “Rat Park” with friends and connections ignored the drug and drank regular water.
All the rats that were alone chose the drug, while the happy rats used less than 25% of the drugs the isolated rats consumed. The experiment continued by taking the isolated rats out of this negative environment after 50-70 days. They were placed in the positive rat park and most went back to having a normal rodent life!
Humans are not much different. In many hospitals, injured patients are given diamorphine, the medical name for heroin. This drug is of a much higher purity than those used by street addicts. Most people come home from the hospital and even after several months of use have no craving for the drug. If this same drug was given to a street addict, they would do just about anything to get their fix.
The answer is the same for people as it is for rats. An environment that provides the basic human needs of belonging and connection turns out to be the best antidote to combat addiction.
What does this have to with investing and the proliferation of expensive and unnecessary investment products? The answer can be found in the environment in which they flourish.
A culture of immediate gratification fueled by commission starved conflicted brokers creates the setting for these financial drugs to proliferate. 24/7 media coverage of investment noise fuels greed and fear and the craving for these destructive products. When you combine this with the brain’s survivor bias, which keeps us alive but makes most people awful investors, a perfect addiction storm has been created.
The answer is not to ban all high-fee, low-value investment products. The solution is to eliminate investors’ cravings by establishing a financial version of “Rat Park.” Instead of colored balls and tunnels, this new environment will could include alternatives to the bad choices.
The Fiduciary Rule currently proposed by the DOL would be a great start. This would demand by law that advisors act in the best interests of their clients. Stringent educational and ethical requirements like the CFP or CFA would eliminate the worst of the “Financial Pushers” from the playing field.
Controls on advertisements like those put on cigarette and alcohol companies could be instituted on firms who have a strong history of pushing the worst financial products on their customers.
Regulatory agencies could be strengthened by enacting rules that disallow current employees from jumping to the companies they regulate for extravagant salaries. This often leads to lax enforcement so not to hinder future employment prospects. Laws could be enacted that prohibit deep-pocketed financial firms from lobbying both political parties. Investor concerns often come secondary to political contributions.
In the end, investors are responsible for their own actions. While this is no guarantee, the chances they would turn down financial drugs would increase greatly if they were connected and well informed. Like the rats, they would make better choices in a supportive environment. Low cost Index funds would replace Class A, B, and C shares in the straws coming out of their version of the rat’s water bottles.
We would all benefit from changing our focus from eliminating the supply to focusing on the root causes of our addictions.