Market Failures/Government intervention

Market Failures and Government Interventions
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Market Failures and Government Interventions
Market failure refers to a situation in which a market fails to satisfy the consumer demands which results when supplies fail to equate to consumer demands. Market failure results from several factors such as transportation, competition on demanders and suppliers, government among others. Their markets face several shortcomings which include market power, public goods, asymmetric information, macroeconomic, externalities, natural monopoly and systematic failures. The market, in this case, faces systemic risks which result when micro decisions lead to macro shortcomings. The brokerage industry was suffering from lack of proper information flow between the public and the brokers and financial and financial institutions (Beillfus, 2017). In attempts to counter this risk, the US government initiated the fiduciary rule which is an impartial conduct standard. The rule helps curb systemic risks in the country by regulating the services financial professionals accord the people. This rule is not a market failure but a form of government intervention to help the people from the exploitation of brokers. This paper seeks to analyze how the fiduciary rule is an intervention on market failures in the financial industry. Also, the paper looks at the opponents of the fiduciary law and their argument against the rule.
For a long period of time, the financial industry has exposed people to systemic risks resulting from lack of crucial information.

The risks subject people to loss of their hard earned money due to lack of information before committing to investments. The problem has been due to the available of brokers who serve personal interests. The fiduciary rule is a government intervention that plays a critical role in controlling these systemic risks by ensuring that the public is fully aware of the nature of investment they are about to commence. For the past decades, there were cases of high rising fees on asset investment and self-directed accounts with financial firms directing clients’ money in accounts that accounts that generate more personal revenues instead of directing the money towards commission-based accounts. The fiduciary rule is a strategy that seeks to redirect brokers’ actions towards the interests of savers rather than on personal interests by getting rid of conflicts that arise on commissions. According to Beillfus (2017), the fiduciary rule helps in facilitation and acceleration of the trend towards self-directed and fee-based accounts. Consequently, the rule leads to an increase in asset value irrespective of the nature of the account. The rule ensures that the brokers do not give incentives to brokers as the commission as a result of pushing funds to certain account types.
Opponents of the fiduciary rule argue that the law is to some extent a failure since it is subject to alterations. Their argument is that since the rule allows some brokers to act as fiduciaries, it promotes conflict of interest since in as much as they want the best for meth customers some they as well want the best for themselves. Also, the rule does not allow the fiduciary brokers to advise savers on taxable brokerage accounts. In addition, opponents argue that the rule allows brokers to advise the investors and recommend customers to accounts that earn them the commission. Consequently, fiduciaries with self-interests can end up recommending clients to commission-based accounts in order to earn more commissions for themselves. The core purpose of a government should ensure that the public is fully free from any exploitation from brokers hence the fiduciary rule does not fully satisfy this, as a rule, can still undergo manipulations. Additionally, the rule requires the customers to look for a fiduciary in case they need to open a retirement savings account. The opponent sees this as a weakness of the fiduciary rule since the customers are the ones to look for a fiduciary and pay them up to 1% fee annually. Consequently, the intervention is a form of an added burden to the customers and might discourage them from looking for a fiduciary. Also, it might be tricky for a person to land in the hands of a genuine fiduciary since it is up to customers to look for a fiduciary for financial advice and account recommendation.
For the past years, the public has had to suffer financial losses at the hands of financial brokers. Consequently, in an effort to lower the losses, the government has come up with a fiduciary rule that aims at ensuring brokers act towards the interests of the customers rather than on personal interests. Although some people oppose the rule due to a few hitches such as having the customers look for a fiduciary and pay them for the services, the rule is beneficial to the financial sector. As Beillfus (2017) highlights, the rule helps reduce brokers’ interests against customers’ interests by getting rid of commission accounts which leads the brokers to recommend customers to accounts that will earn them commission rather than on accounts that will give the saver good returns. As earlier mentioned, the fiduciary rule advocates for accounts that do not generate commissions but accounts that pay a set fee to brokers. As a result, the brokers will not be lured to recommend accounts based on own interests but the general good of the customers. Since its inception, the rule has seen the assets of clients appreciate in value $2 billion to $13.6 billion within a period of one year (Beillfus, 2017). It is, therefore, true to say that the fiduciary rule helps curb systemic risks in the financial brokerage sector by ensuring that clients are provided with all necessary information before committing to invest in retirement assets.
In conclusion, this government intervention is crucial and in a great way helps resolve the market failures prevalent in the brokerage sector. For instance, as Tergesen (2017) explains, the fiduciary rule requires the customers to look for a broker fiduciary who takes them through the different retirements savings accounts and recommends the best account based on the customers’ interests. By ensuring that financial institutions have fees-based rather than commission-based accounts, the firms lower the possibilities of brokers luring customers to accounts that offer the brokers’ sales incentives hence reducing the existing conflict of interests between brokers and clients (Tergesen, 2017). The role of the rule is to ensure that all brokers serve the interests of customers at all times. The broker fiduciaries ensure that customers have all the crucial information they require before settling on any retirement investment account hence avoiding unforeseen financial losses. However, the public should be careful when looking for a fiduciary since there are some brokers who work as fiduciary experts and this can at times subject customers to conflicts of interest if they land on the wrong brokers.
References
Beillfus, L. (2017). “Fiduciary Rule Accelerates Account Shift Across Brokerage Industry. Wall Street Journal.
Tergesen, A. (2017). How to Find the Right Financial Advisor.