Felix Salmon has been following the photographer Annie Liebovitz’s personal-finance train wreck, and here he gets to a root of a financial-products regulation problem:
[There’s] a particularly American mindset: call it the Wealth Corollary of the Efficient Market Hypothesis. In a nutshell, it says that if you’ve made lots of money, you must be pretty smart.
I think there’s a pretty good case to be made that the EMH(WC) is responsible for a lot of the rules surrounding the limitations on who is and who is not allowed to invest in hedge funds, and also for many of the obsequious interviews with rich individuals frequently featured in the financial media.
I do feel a little sorry for the EMH here, as American worship of the rich is more a religion unto itself. In a casual rendition, after all, the EMH suggests that if you’re making lots of money in the market, you’re some combination of lucky, patient, in possession of information that isn’t generally available, exploiting market power, and/or crooked. On the human-capital front, brains are neither necessary nor sufficient for making lots of money. The elevation of select nerds to the ranks of the super-rich via hedge-fund management in no way violates the conditions of my ‘folk EMH.’
Felix also makes an obvious but seemingly not widely recognized point (despite debacles like Bernard Madoff’s Ponzi scheme) that exploiting the financially-unsophisticated rich is profitable, since that’s where the money is:
The annals of finance are full of people taking advantage of the financially-illiterate, and while it’s certainly possible to take advantage of the financially-illiterate poor (lotteries, numbers games, payday lending, overdraft fees, etc) it’s equally lucrative to take advantage of the financially-illiterate rich, both through outright fraud and through hidden and/or excessive money-management fees.
A few years ago, I was shocked to see the statement of the time from the financial advisory business now known as Ameriprise; it looked like it was designed to conceal what they were charging, especially compared to the relatively transparent material I’m used to from Vanguard. Some disclosure-oriented reforms would help to some extent, though they wouldn’t obviously do much for the other problem I saw in this case, which was the financial illiteracy of the CFP responsible for the set of investments in question. Other seemingly excessive fees (as in, why hasn’t massive entry competed them away), such as the standard 2-and-20 hedge fund fee structure, are not hidden at all.