In every industry and in life, there are people and businesses that try to do the right thing. No business or person is perfect and there are plenty of gray areas, but a majority of financial advisors, police officers and other everyday good people are in their careers for the right reasons. It is merely the bad apples who get the headlines.
Last week a report came out about a hedge fund manager who paid terminally ill patients to use their names in a bond-buying scheme. The manager paid the patients $10,000 to use their names in joint ownership to buy bonds and certificates of deposit at a discount and when the terminally ill patients died, he redeemed them at par (a special feature of some securities). The scheme generated $9.5 million in profits and the SEC is crying foul.
There is always the infamous bad guy in every industry. Certainly the financial industry’s black eye is Bernard Madoff because of the amount stolen, people affected and how long his Ponzi scheme existed. An advisor with Next Financial in Altoona was recently barred by FINRA from the industry for misappropriating investor funds, purportedly including the Ashville Veterans of Foreign Wars (VFW) account. These are a few of my industry’s villains and the bottom line is no one wants their field judged by the lowest common denominator. However, when it comes to regulation, it happens.
Take for instance the latest Department of Labor rules coming to the table.
The DOL overtime rule was updated and becomes effective the beginning of December. The new rule takes the salary threshold for paying overtime to $47,476 per year. This is an increase from the existing amount of $23,660 per year, doubling the pay needed for employees to be exempt from overtime (paying time-and-a-half for any work over 40 hours per week). This rule is geared toward businesses that pay a minimal salary but expect workers to slave extended hours thus making their hourly wage incredibly low. There are exemptions but they are few and far between. Many businesses cried foul, including the National Retail Federation (NRF), which called the overtime rule a “Career Killer.”
The avenue most businesses are taking is to switch affected workers from salaried to hourly workers with an equivalent hourly wage commensurate with the overtime hours actually worked. In the end, it doesn’t help most employees and it adds to the employer’s burden of figuring and paying employees, especially smaller companies.
What is the additional estimated cost to tracking hours under the new rule? $745 million. That money must come from somewhere. When the government laments about middle class wage stagnation, they need to be reminded of the increased cost of healthcare to businesses (I recently heard of a small business whose premiums jumped 52 percent this year) and the increasing burden of regulation.
I will step down from my soapbox now.
The other DOL rule is targeted directly at the financial industry and is being hailed as our industry’s Affordable Care Act (or as it is commonly called ObamaCare). Ameriprise estimated costs so far to comply with the rule is $11 million and Morningstar’s study puts the cost to the entire industry at $2.4 billion. That’s not chump change. In our case, we are cutting back on advertising (including charitable contributions) and maintaining staff levels due to the increased regulatory burden. Until the rule is fully implemented and our costs are known, belts are tightened.
Money going toward regulatory burdens takes money from communities, employees and innovation. In my opinion, it doesn’t create solutions or eliminate problems. Those that wish to be unethical or pull a Madoff won’t be stopped by rules or laws or regulations.
The answer comes from the culture of the firm. Ethics and a client-oriented culture need to be built into the everyday practices and interactions. Culture creation through regulation is a myth.
