Much is made in the investment industry, and specifically the alternative investment industry, of the importance of education. Few would challenge the conventional wisdom that education is good and that more education is even better. However, little thought or explanation is given as to why today’s investment environment requires this almost single-minded focus on investor and advisor education. Hasn’t education always been important? What is it about today’s investment solutions and markets that requires a change to how we make investment decisions?

The answer is, almost everything.

My colleagues, Mike Kelly and Lara Rhame, focus on some of the challenges that confront today’s investors. Mike blogs on the struggle to find income, growth and diversification and how alternatives can help meet those challenges. Lara focuses on the macro economy and markets, providing context for how global events can impact individual portfolios. For this post, I focus on a third dynamic confronting investors and advisors that, as a father of two young boys, reminds me of a game of monkey in the middle. Many savers, retirees and individuals are struggling to build portfolios that meet their long-term financial goals. Part of the investors’ struggles relate (sometimes) to conflicting regulatory mandates. Unlike the rules of monkey in the middle, however, the opposing regulatory forces are not intentionally trying to keep investors from their goals – which makes winning the game even harder.

So who are the regulatory players in this game? There are two broad layers of financial regulations these days – macro and micro, to analogize two well-known areas of economics. Macroeconomics deals with the economy as a whole. It examines changes to such things as GDP and employment rates. The focus is on the big picture. Microeconomics examines the behavior and decisions of individual people and businesses. The focus is on singular decisions and choices. With economics, whether it’s macro or micro, we can better understand one by looking at drivers of the other. After all, millions of individuals and businesses ultimately drive a country’s GDP, while changes in a nation’s employment rate impact individuals’ buying decisions.

Just as there are economists who take a macro or micro view of the financial world, there are also regulators who focus on the macro and micro components of the economy.

At the macro level, we have the central banks, the regulators of national monetary systems, which are currently struggling to stimulate the global economy. In Europe and Japan, central bankers have pursued negative interest rates to spur growth. In the U.S., the Federal Reserve has engaged in unprecedented and persistent accommodative monetary policies. Some describe these low interest rates as a “war on savers” – the incentive to save has been removed given the limited returns traditional savings now generate. For evidence of this moniker, I have to look no further than my local bank branch, which is currently offering 0.01% annual interest for new savings accounts. Whether one agrees with the central bankers’ approach is irrelevant. Their objective is to drive down interest rates in order to encourage investment and, some may say, risk taking.

On the other end of the regulatory spectrum, the more micro level, we have agencies such as the U.S. Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA) and the Office of the Comptroller of the Currency (the OCC). The SEC enforces federal securities laws with a core part of its mission focused on protecting investors. FINRA regulates broker-dealers and the financial advisors who work for them, again with a focus on protecting individual investors. The OCC regulates many national banks to make sure banks operate in a “safe and sound manner.”

When viewed through this lens, we can see the issue. There is presently a tension between what the Fed is trying to accomplish at the macro level and the investor behaviors that the SEC, FINRA and the OCC are attempting to govern at the micro level. The Fed wants to stimulate growth by encouraging investment and risk taking, while the SEC, FINRA and the OCC want to protect and limit investors’ exposure to risk by placing limits on certain types of investments they can make.

Neither one is “right” nor “wrong” in their approach. Each is looking to fulfill its clear and principled mission. However, our portfolios are stuck in the middle.

On the one hand, a low growth and low interest rate environment may drive investors’ to seek the types of investments that provide a portfolio with consistent levels of income. On the other, investors now more than ever need to be made aware of the risks that may accompany these types of investments.

What are financial advisors and investors to do?

Education. Many have argued, and I agree, that the 60/40 stock-and-bond portfolio that served previous generations is essentially extinct.To generate adequate returns, portfolios now need to incorporate different asset classes and investment approaches. These new asset classes will have different benefits and risks from what many investors, advisors and regulators have seen before. These benefits and risks need to be understood. This different approach, this change to the way portfolios have been constructed for decades, is a new kind of risk, but one that may partially be mitigated through investor and advisor education.


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