George Stathopoulos Comment On Regulatory Notice 22-08
George Stathopoulos
N/A
Any restrictions on the investment opportunities of retail investors are fundamentally misguided. Though an increase in due diligence might be helpful in guaranteeing brokers do not offer inappropriate investment advice to their under-informed clients (which is already disallowed), anyone who is willing to read the prospectuses and understand the products they are investing in should be absolutely free to invest in any way they would like, without regards to any holding period restrictions or the like. Restricting retail from investing in leveraged ETF's (at any time horizon) will not protect the few that are willing to enter needlessly risky position regardless. It will always remain possible for irresponsible investors to lose dramatic amounts of money by investing in unlevered, highly volatile, individual securities. Furthermore, irresponsible investors will always be able to acquire margin in other more damaging manners, such as taking out loans or mortgaging assets such as real estate. For any irresponsible investors who eschew performing due diligence on their investments, their appetite for risk will be satisfied either way (to perhaps their detriment). By restricting complex products, it only hurts the investors that are qualified and able to use these products to their advantage. In fact, as the Yale economists Ayers and Nalebuff showed in their seminal paper "Life-Cycle Investing and Leverage: Buying Stock on Margin Can Reduce Retirement Risk" (2008), it might even be considered criminal negligence on the part of regulatory bodies to keep simple, retail investors from being able to acquire sufficient leverage at parts of their lives, as it can provide a significant source of temporal diversification. Beyond just acquiring leverage, inverse ETFs can also be crucial in hedging otherwise difficult to hedge risks. For instance, in today's rising interest rate environment, the value of future cash contributions declines with each increase in the market risk free rate. This can easily be hedged by buying an inverse bond ETF. In fact, being able to hedge otherwise expensive or difficult to identify risks in people's portfolios (such as sector or factor exposures) or everyday lives is crucial many people's usage of these ETFs. Being able to 'contract out' the 'grunt work' is almost priceless. Personally as a registered representative, it is very embarrassing that FINRA would seek to mitigate the potential cost of frivolous lawsuits, at the expense of potentially increasing customers' years to retirement by a decade and restricting their autonomy. Such lawsuits shouldn't happen in the first place, given rules already put in place to protect retail investors from predatory brokers and unsuitable advice. If any changes are to be made, perhaps increasing enforcement and regulatory transparency are the appropriate response, not draconian restrictions that hurt the very people one is nominally trying to 'protect.'
George Stathopoulos Comment On Regulatory Notice 22-08
Any restrictions on the investment opportunities of retail investors are fundamentally misguided. Though an increase in due diligence might be helpful in guaranteeing brokers do not offer inappropriate investment advice to their under-informed clients (which is already disallowed), anyone who is willing to read the prospectuses and understand the products they are investing in should be absolutely free to invest in any way they would like, without regards to any holding period restrictions or the like. Restricting retail from investing in leveraged ETF's (at any time horizon) will not protect the few that are willing to enter needlessly risky position regardless. It will always remain possible for irresponsible investors to lose dramatic amounts of money by investing in unlevered, highly volatile, individual securities. Furthermore, irresponsible investors will always be able to acquire margin in other more damaging manners, such as taking out loans or mortgaging assets such as real estate. For any irresponsible investors who eschew performing due diligence on their investments, their appetite for risk will be satisfied either way (to perhaps their detriment). By restricting complex products, it only hurts the investors that are qualified and able to use these products to their advantage. In fact, as the Yale economists Ayers and Nalebuff showed in their seminal paper "Life-Cycle Investing and Leverage: Buying Stock on Margin Can Reduce Retirement Risk" (2008), it might even be considered criminal negligence on the part of regulatory bodies to keep simple, retail investors from being able to acquire sufficient leverage at parts of their lives, as it can provide a significant source of temporal diversification. Beyond just acquiring leverage, inverse ETFs can also be crucial in hedging otherwise difficult to hedge risks. For instance, in today's rising interest rate environment, the value of future cash contributions declines with each increase in the market risk free rate. This can easily be hedged by buying an inverse bond ETF. In fact, being able to hedge otherwise expensive or difficult to identify risks in people's portfolios (such as sector or factor exposures) or everyday lives is crucial many people's usage of these ETFs. Being able to 'contract out' the 'grunt work' is almost priceless. Personally as a registered representative, it is very embarrassing that FINRA would seek to mitigate the potential cost of frivolous lawsuits, at the expense of potentially increasing customers' years to retirement by a decade and restricting their autonomy. Such lawsuits shouldn't happen in the first place, given rules already put in place to protect retail investors from predatory brokers and unsuitable advice. If any changes are to be made, perhaps increasing enforcement and regulatory transparency are the appropriate response, not draconian restrictions that hurt the very people one is nominally trying to 'protect.'